SunCoke Energy Inc (SXC) 2012 Q3 法說會逐字稿

Welcome to the SunCoke Energy third-quarter 2012 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 the Director of Finance and Investor Relations, Ryan Osterholm. Sir, you may begin.

Thank you, Christine. Good morning everyone. Thank you for joining us on our third-quarter 2012 earnings conference call. With me 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 Q &A. 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 over the call to Fritz, let me remind you that the various remarks we make about future expectations constitute forward-looking statements and the cautionary language regarding forward-looking statements in our SEC filings apply to our 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 it over to Fritz.

Thank you, Ryan. Good morning, everyone. Turn your attention to page 2 in the earnings stack. It was a strong quarter for us, really driven by our coke business. Our adjusted EBITDA was up 62% year-over-year and actually sequentially continued to improve throughout the year. EPS was up 73%. We still had a capital structured difference in the EPS calculation versus the quarter of last year because we had a small number of days before we went public last year.

There are still some comparability issues on EPS, but on adjusted EBITDA there are no comparability issues in a good, strong quarter driven by Middletown. The other thing I'd say is, our other coke facilities continued to perform well. Last year in the third quarter was our best quarter in terms of EBITDA per ton in our coke business and we did not have Middletown running. This year we have Middletown running and running well. And the rest of our facilities continuing to run well. Coal delivered slightly favorable results benefiting from higher year-over-year price and volume. There was about a $3 million favorable contingent consideration adjustment.

Our production cost and reject rates increased, and as we look at our coal earnings, I would term it disappointing. I'm going to come back and talk about that later. Our liquidity position -- we ended the quarter with cash of about $160 million. Mark will take you through the details of this. Our revolver is virtually under, on -- we always use the word virtually because I think we have $0.9 million that backs up letters of credit, for example. I can't say it's undrawn. Free cash flow -- we're updating our free cash flow guidance today. We expect it to be -- free cash flow to be in excess of $100 million this year with $60 million-plus in the fourth quarter.

Last point I'd make is we are refining our range, we are confirming our guidance for 2012 and then we are refining it. Recall that our adjusted EBITDA range is $250 million to $280 million, given three quarters behind us, we are refining that slightly to $255 million to $270 million, which would imply $61 million to $76 million in the fourth quarter. Recall in the fourth quarter is when we record our Brazilian dividend. That's about $9.5 million that would be expected to be recorded in the fourth quarter. Last point I'll make on the MLP. The efforts continue. This morning we filed our third amendment and we continue to pursue the MLP for Middletown -- for a portion of Middletown and Haverhill's coke plants. And we'd be happy to take questions on that later. To the extent we can, actually.

I'm going to turn it over to Mark.

Thanks, Fritz, and good morning. A good quarter overall with all of our year-over-year financial metrics being up against a very strong quarter that we had in Q3 of 2011. As you'll see from chart 3, most of the improvement in both revenue and earnings are attributable to our Middletown operation, which contributed almost $17 million in adjusted EBITDA. As Fritz indicated, all of our coke plants are running well, and with that we recorded EBITDA per ton on our domestic coke business of $61, which is up $11 per ton on a year-over-year basis.

On our coal business, we earned approximately $10.7 million of adjusted EBITDA -- that's up $1.5 million. About $1.3 million of that is related to the year-over-year improvement in the contingent consideration adjustment. This relates to our Harold Keene purchase and really reflects the fact that our outlook, in terms of mining of hi-vol and thermal coal, is down considerably. And so that is included in our coal results in the quarter. Finally, on corporate cost, we were down year-over-year. We did benefit from the comparison to roughly $4.5 million of both relocation and cost that we incurred at Middletown prior to it becoming operational in the fourth quarter.

Net-net, or corporate spending, is down in the quarter and we will be revising our full-year outlook downward as a result of our performance through Q3. As Fritz mentioned our earnings per share is at $0.45, reflects really a strong performance in our coke-making business, offset by financing cost -- somewhat offset by financing cost, higher depreciation, and higher tax expense on our higher earnings. Turning to chart 4, we have the adjusted EBITDA bridge from Q3 of last year to this year. As you will see, Middletown was a significant contributor in the quarter. There has been significant focus after the start-up on improving yield and in reducing costs related to contractors that were on the site at start-up, and that really came through in the quarter.

With respect to the rest of the coke business, we're showing roughly $2.6 million improvement. I'd say the Indiana Harbor performance on a year-over-year basis is approximately flat. But we also benefit from the fact that we own more of Indiana Harbor -- there is less non-controlling interest as a result of the purchase of GE's interest in Indiana Harbor last year. Additionally, the rest of our coke facilities were able to build marginally on a very strong Q3 last year. As I indicated earlier, coal mining is up, an essentially flat performance, where we have higher prices in volumes offsetting higher cash costs and then what really flows through on a net-basis is the benefit of the contingent consideration. And corporate is down $6.6 million, again roughly $4.2 million relates to both the relocation last year, as well as the Middletown cost that we kept at corporate until it became a productive asset.

On chart 5, we cover the EPS, again, roughly $0.40 relates to the improvements in our operations. And then we have a $0.19 headwind related to depreciation, financing and taxes. Again, depreciation primarily relates to the additional assets at Middletown. Financing, as Fritz mentioned, we haven't quite lapped our capital structure, which we had from the IPO, which was in late July of last year. We also had some capitalized interest at Middletown last year, which affects that comparison.

And then finally on taxes, our tax rate is quite similar on a year-over-year basis. So this just really reflects the fact that we are earning more income. On liquidity, again, the quarter benefited by our very positive earnings. But we did have some working capital headwinds, which affected our recorded cash balance. As noted in the chart, we did have a customer payment, which was received one day after quarter close. So the quarter ended on a Sunday and the payment was received the day after of approximately $24 million, and that is a fairly big contributor to the unfavorable accounts receivable in the quarter.

We also had the impact in the quarter of building coal inventory at our coke plant ahead of the Q3 labor negotiations at a number of our customer sites. What that also reflects is in the negative accounts payable. We buy coal on thirty-day payment terms, so a buildup in August basically reflects as a payable draw down in September. And so you will see that flowing through there. Our inventory is showing positive here in the quarter. And actually, it relates to the fact that we were able to reduce coke inventory at all of our plants, including the coke cover inventory that we purchased last year at Indiana Harbor. We were able to sell some of those tons in the quarter. And then finally, as you'll see from our coal results that we sold more tons than we produced. So we reduced coal inventory in our coal mining business as well. As Fritz alluded to earlier, we do expect that we will have favorable working capital in Q4 and they're still anticipating free cash flow in excess of $100 million for the year.

The other two things I'd point out in the quarter are the fact that capital expenditures are picking up consistent with our full year guidance. We had roughly $20 million in the quarter. Additionally, we made a $4.6 million pension contribution. This is to our coal pension plan, which is capped and frozen and which was about $6 million underfunded at the beginning of the year and we expect, with lower interest rates that that plan will become more underfunded at year-end when we do our valuation. So we thought, in a year where we had relatively light capital expenditures, that we would take the risk of having too many future contributions off the table by $4.6 million contribution in the quarter.

Turning to chart 7, what you will see here is, again, a very robust quarter in terms of both production in our domestic coke facilities, as well as our EBITDA per ton of $61. Again, we benefited from continued improvement at Middletown and strong operations at all of our plants. We are continuing to project that we will earn between $ 55 and $60 per ton at our domestic coke facilities. I would point out that in Q4 we have a number of planned outages at Granite City and Haverhill. And so, we would expect that Q4 -- we would probably be at the lower end of the guidance range relative to our EBITDA per ton.

And as we look out into next year, I think we are at the point where we are assessing, the needs -- the volume needs of our customers. We believe we can continue to make improvements at Indiana Harbor. And at Middletown, we will have potentially better operating cost recovery in 2013. But at this point, we will remain with the $55 to $60 a ton until we have more definition on 2013.

Turning to chart 8, we are looking at the return on invested capital. You know, last year when we started to present this chart, there was some concern that with the addition of our Middletown investment, that we may not be able to generate double digits, pre-tax return on invested capital. And so, I think our assertion at the time was that, you know, as long as our plants run well, we have good contracts that we would generate good returns. I think, you know, it's now been three quarters since Middletown has been up. And I think what this shows is that we are back to our pre-Middletown ROIC in the quarter, and it basically supports our position that, if our plants run well, it generates positive earnings, positive cash flow, and very good returns.

Turning to our coal mining business, as you will see from the chart on the left, our prices this year, which are largely fixed -- are largely set for the rest of the year, are up roughly $10 a ton from $155 to $165. We had a fairly similar move in our cash cost per ton. And relatively flat EBITDA per ton. Again, without the benefit of the contingent consideration adjustment that we took in the quarter, we're showing a year-over-year basis as a about a $1.3 million increase. So we recorded $1.9 million last year. We recorded $3.2 million this year for a net increase of $1.3 million. Which more or less speaks to the change in adjusted EBITDA.

We did have some yield and productivity challenges in the quarter. I would also add that the comparison on cash costs per ton also is unfavorably impacted by the shift in mix, away from hi-vol and thermal coal at Harold Keene, to more of the production at Jewell. And so, in the quarter we recorded cash cost per ton of $149 versus $138 last year. And we did deteriorate from the $143 that we recorded in Q2. We obviously believe there's work to be done in coal mining.

And with that, I'm going to turn it back to Fritz to talk about some of the things that we plan to do here.

So, I guess the point I would make on chart 9 is -- I'd call your attention to the reject rate which ticked up in the quarter from 66% to 67%. And as we look at our production and cash cost that was a disappointment. Because we began to see some favorable moves in that regard in the second quarter and it went the other way by one point, but one point is meaningful in this world. What I want to do is talk about what we're doing on both cost and yield on page 10. The backdrop for all of this, obviously, is the expectation going into next year that met coal prices will significantly decline from those which were contracted for this year. We do not know exactly where those prices are going to be. We are in negotiations in effect today in a number of important areas.

So, I would say in this regard I don't have anything to add in terms of what pricing will or will not be. Negotiations are fairly sensitive, so I would say, we are with our customers, in some cases we've actually completed coal buys but in most cases we have not yet. We are expecting met coal prices to be down significantly year-over-year. So what are we doing to try to get ready for that environment? And address what is an unsustainable level of cash cost in our Jewell underground mining. At $149 in the third quarter, it is not a sustainable level under any sort of scenario.

First thing we are doing is we're rationalizing our underground mining plan. We are idling two of our six company-operated mines, and idling three of our eight contract mines. The contract mines include the Harold Keene operations. First thing we are doing is we are actually reducing the number of mines that we're mining from. We're maintaining the idle operations on a standby basis -- if and when markets improve. Our view is today we should assume that the markets are going to stay, that the met coal pricing is going to stay challenged for certainly at least 2013. We felt the wise thing to do was for us to consolidate mines, which we're doing and will be doing in the fourth quarter.

So we will be running in this basis as we go into early next year. We're concentrating our people and equipment in the remaining mines. We're leveraging lower variable costs. We will have lower royalties, we will have some lower transportation costs, and so there are some part of our costs which will decline simply because of the reduction in both volume as well as pricing.

We are implementing improved underground mining practices. This has been ongoing work through 2012. A reasonable percentage of our miners, our red hat miners -- a reasonably large percentage actually -- and as they get better trained as we continue to do work with them, they can be more -- they are being more and more productive. I would say we can continue to work on fewer mines and improving what we are doing at the mine face. For example, our largest mine we are relocating two of our operating sections closer to the portal. That's expected to significantly lower costs and improve productivity and yield, and implement deep-cut plans as [M-share] approvals for those plans are received. We are installing new cyclones and ultra fine circuits in our prep plant, which we expect to be completed by year-end. And that we view can improve yield by at least 2% and achieve a payback in less than two years; our best estimate today is 18 months.

And the last one I would like to make of this chart, with respect for the Jewell underground operation, the actions that we have taken so far would reduce our cash costs. Not cash cost per ton, but our cash cost in aggregate by at least 10% as we go into next year and we are evaluating additional measures that might allow us to reduce that further, depending upon obviously what happens with the final met coal prices for next year. So on page 11, as we think about next year's plan, we are planning around flat volume versus '12, about 1.5 million tons. Of the 1.5 million tons, however, that we would sell, our revelation joint mining venture as well as purchase coal would be about 30% of our volumes in 2013. That compares at about 15% this year. So we are stepping up our coal source from revelation as well as coal purchase. And the simple reason is because it is much lower cost.

We are doing that, we think it's the prudent thing to do. It will change our overall average cost per ton as we go into next year. Obviously, the focus though remains on Jewell and the remaining tons that we sort in terms of lowering cash cost. Our pricing, as I said, is in process today. We would anticipate updating our outlook once pricing is finalized in the fourth quarter of this year. But it will be significantly down from the $168 a ton, obviously.

So, as we look into next year, despite the work we are doing on reducing cash cost, despite the additional tons being sourced in revelation, given the downdraft in pricing, we expect significant margin pressure next year in coal. And we would expect coal to contribute minimally to '13 results. We'll have more specificity on this as we pin down our pricing in the fourth quarter of this year.

Back to you, Mark.

So, for the full year adjusted EBITDA outlook, we're projecting, as Fritz indicated at the beginning of the call, $255 million to $270 million. That will indicate then that we're estimating Q4 between $61 million and $76 million of adjusted EBITDA. And, again, as Fritz mentioned, we accrue our Brazilian dividend in this quarter, and so you could see that, x the dividend, we would expect the quarter to not be our best quarter this year, really on the basis of the outages that we plan at Granite City and Haverhill. But again, reaffirming our full-year guidance with the refinement in the range.

And then finally, on chart 13, we've just made some minor updates here, again, to reflect the refinement of our adjusted EBITDA range. The inference on EPS would be $1.30 to $1.40 for the full year. Capital expenditures we expect will come in at $75 million. This is down slightly from the estimate we gave in Q2. And then, as I indicated earlier, our corporate costs for the full year, we anticipate to be somewhere between $29 million and $32 million. And then finally, coal production, based on where we are through Q3, we'd expect to be roughly 1.4 million tons.

With that, we will open it up for questions.

Thank you. We will now begin the question and answer session.

(Operator Instructions).

Andre Benjamin, Goldman Sachs.

Good morning. A couple of quick questions.

First, I know Fritz you indicated a willingness to maybe give us a little bit more color around your [announcement for structure] activities. I know you filed the updated S-1 this morning. I personally did not get a chance to go through it, but is there anything else that you can tell us about plan timing, how things are progressing with the SEC? Any major changes that might have been tucked in today's filing that others that may not have gone through it haven't caught yet, et cetera?

Well, I can just say -- I can't really comment beyond what's in the filing. You'll get a chance to read it. I would say, Andre, we feel like we're on our plan in terms of timing.

We have communicated throughout, since we filed the original S-1 that we would target a -- an offering certainly, we said no later than -- excuse me, no earlier than the fourth quarter. We are now centrally in the middle of the fourth quarter, but I would say we feel like we are making good progress and we feel like we have a reasonable opportunity to meet a end-of-year timing. But, obviously you will have a chance to read the document. We did not actually plan it around the earnings call, but it is basically the normal process of addressing SEC comments.

Got it. And then, as I think about some of the longer-term growth opportunities you guys have talked about in the past -- the combination of a new Kentucky facility or the JV in India, is there any more color you can provide on that?

We are in negotiations in India. I am subject to a confidentiality agreement so I am not going to name the company. But we do feel like we can accomplish our goals and get into business in India next year.

And with respect to Kentucky, we are going through the normal permitting process, and we do anticipate moving forward to getting that plant permitted. As I look at timing, Andre, it would probably be early next year that we would get all of our materials put together and submitted for permitting purposes. But that is still work in process and frankly no change from where we have been before.

Thank you.

You're welcome.

Paul Cheng, Barclays Capital.

Good morning. Several questions if I could. Will you be able to comment on the other domestic coke, how many of the plans, in addition to Middletown that is going to drop it down that, within the next two years when you are still under the restriction of the tax code that you can actually (indiscernible - heavy accent)?

I would say at this point, we have no additional plans for further drop downs. We have no plan, I want to make sure I am clear on that. With respect to future drop downs, our entire focus is on getting this MLP IPO done and doing it with 65% of Middletown and Haverhill.

I understand that. I'm just trying to see whether we can get some understanding that the law -- what is the restriction on the law then how many of them you would actually -- you can still drop down without violating and that trickling into a tech implication?

It's not a question of law, actually. It is a relatively complicated process. I would say, our tax-sharing agreement, the limitations that flow from the tax-sharing agreement -- that agreement expires January 18, 2014. It's basically two years from the distribution date.

Right, I understand that. I'm just trying to say that within this two-year period, that on June say 2014, what -- how many plan is it -- is there any guidance you can give us on what is the limitation?

I think the answer is no. There is absolutely nothing I can say beyond what we've said.

Okay, that's fair. Any update you could give us in terms of the Indiana Harbor negotiation? Any additional color?

I would say we continue to improve the performance at our Indiana Harbor plant, which is encouraging. Our customer is encouraged by that. We are spending to improve our oven performance.

We are working with coke energy and we have had very good dialogue with our customer. I don't think there's anything new I can report relative to where we were the last quarter. But I would say we are encouraged and we still feel very confident that we will be able to reach a reasonable extension agreement with ArcelorMittal at Indiana Harbor.

On Middletown, you were looking at the third quarter result on your adjusted EBITDA, that's about $110 per ton on the production (Indiscernible - heavy accent). Is that a reasonable estimate going forward? Or that the third quarter has been benefited by some higher sales. Is there anything we should be aware?

Our third-quarter performance of Middletown was quite good, and we anticipate that we would continue to operate -- and we can operate Middletown at these levels. Obviously, where they are in any given quarter -- sometimes they have outages and there are things like that -- but I think Middletown is basically at this point meeting our expectations for profitability and EBITDA per ton.

Is the sales volume and the production volume the same in the third quarter for Middletown?

Let's go back to the chart, actually. I think it is chart 9.

I would say there relatively equal. So what we report on here is the production. But the sales were actually within 4,000 tons.

So we can really (inaudible-multiple speakers) much from the sales of the inventory on that. So that is a pretty clean number?

Yes. We don't generally have -- we ship to our customer in Middletown across the conveyor so we don't have a lot of inventory.

And I think, Mark, you mentioned, that you'd been selling down inventory on coke -- that your coke sales volume is higher than your production for the last couple of quarters. As of the end of the third quarter, from an inventory standpoint, are you now pretty normal, or that we should assume you would continue benefit from the sell-down of inventory in the coming quarters?

I would say in terms of coke inventory, we continue to sell down the coke cover that we had last -- that we purchased last year for Indiana Harbor. So we would expect some nominal reduction in coke inventory for the rest of the year. I would say, our coke inventory at our plants, we think is normal at Q3 levels.

And then I think we have an opportunity to reduce our coal inventory. This is the coal that we buy to coke at our plants. You know, in Q4, so you would expect Q4 working capital to be positive.

And it has to be to meet our $100 million free cash flow guidance for the year. I think you would conclude that.

Thanks, Paul.

Dave Adam Katz, JPMorgan.

I was just curious, with the change in the outlook on coal and with the continued appeal of eventually moving forward with Kentucky, has there ever been any thought given to eventually divesting the coal assets to provide funds to move forward with Kentucky?

I would say, David, what we are doing on coal, is doing everything we can to optimize the asset we have. No, we have not given active consideration or even inactive consideration to divesting the coal business. There are some limitations that flow from our tax-sharing agreement, which are very clear.

So even if we had a desire to, it could not be considered until 2014, after the expiration of the tax-sharing agreement. Today 100% of our effort is focused on reducing costs, optimizing the asset, being productive, being safe, being efficient, and leaving our options open for the future.

I understand that as the current focus, but in terms of leaving the options open for the future, when one looks at the expenditure that would be necessary to proceed with Kentucky, when do you expect that expenditure would occur?

We would expect spending in Kentucky to really begin in earnest in 2014. We get the permitting done early next -- if we submit the permitting, not get it done, if we submit the permitting documentation, there is about a 1 year lead-time on permitting. So you wouldn't really have capital spending until 2014.

So theoretically the two could align.

Well, they'd both be aligned in 2014. Mark, you've got something you want to add here?

I would say we have no plans to divest of our coal business at this time, obviously. And I'd say secondly, when you look at our cash balance today, plus the cash that comes back to the parent through the MLP transaction is outlined in the S-1, we have significant liquidity resources to fund all capital expenditures up at SunCoke. And so, I don't think we are thinking today that we need to divest of our coal business to provide funding for our future coke expansion.

Both our India plant as well as the Kentucky facility, additionally, you will know that through the S-1, we are retaining funding from the transaction at the MLP to pre-fund existing obligations. So, I think at this point we feel comfortable that we don't need to divest our coal business.

Excellent, thank you.

Garrett Nelson, BB&T Capital Markets.

Yes, good morning Fritz and Mark, and congratulations on another strong quarter.

Thanks, Garrett.

On coal, it looks like you are planning to dial back your Q4 production from the rates of the first three quarters to a little under 300,000 tons. Could you add some color on what assets you are planning on focusing on?

I would say the fourth quarter is historically lower because you have Thanksgiving and Christmas. You have a lot of holiday days in the fourth quarter in the mining business. I think that would drive a certain amount of ton reduction from the third quarter.

I would say the other thing we are focused on in the third quarter is implementing the actions in the fourth quarter in terms of our mine plan so that when we hit the ground January 1, 2013, that we have those actions implemented. So there is some -- for example, our largest mine, moving these areas is going to have some effect on production, as we make the moves in the fourth quarter.

But we think all of this is the right thing to do so that as we hit 2013, we can be as efficient as we can. So we will be down, but I'm looking over at Ryan to -- because I think that number sounded low -- 300,000.

I think 300,000 is about right.

Okay.

And then we just wanted to make sure we understand what's going on in the cash flow statement. As you guys highlighted, there was a $24 million receivable that was pushed from Q3 into Q4, which impacted your cash from operations for the quarter and your quarter-end cash balance. But it looks like you're expecting some additional working capital in Q4 to get to your full-year cash flow from operations guidance in excess of $175 million. Mark, can we assume that most of that will appear on the accounts payable line due to the coal impacts that you mentioned?

I would say it should show up in both inventory, but more so in accounts payable. You are right.

It's $100 million, not $175 million.

Okay. Free cash flow was $100 million, right?

That is correct.

And the cash flow from operations is $179 million.

Oh yes. If you look at the first line, yes.

Okay, thanks very much.

You're welcome.

Sam Dubinsky, Wells Fargo.

Just some quick questions on the Granite City and Haverhill maintenance outages. Are those reflections of a weakening demand of steel companies forcing you turn down coke batteries a little bit more than expected? Or are there just some costs that were underestimated in exiting the year? And also what exactly are you doing to the coke batteries?

What we do with an outage -- these are planned outages. For example, we took our outage in Granite City on October 1, we took our outage in Haverhill in October, it happens just about every year. Actually, it does happen every year in HRSGs, the FCD is sometimes every two years. This is normal, it's planned. But what happens when you do it, is you do -- you go in you basically turn down the HRSG and you go in, you clean them, you make tube repairs, you fix any leaks that are there, you go into your FCD you repair them.

And what you have is -- what happens from a financial statement standpoint when you have an outage is three things. One, you have some diminution in volumes, simply because you're charge way to generally reduce somewhat when you execute the outage. Second, as you have left power revenue because you're not generating the energy sales. And third you have the expense. We actually expense the cost of outages as opposed to capitalize them.

So when we're going in and repairing tubes, making changes, fixing things, we expense that. That's normal, It happens at all of our plants and the timing of that is why the $55 to $60 can be variable depending upon the timing of outages in our plants. Doesn't reflect any changes from a customer standpoint.

Okay, so just to be clear, the guidance was lower a little bit because you have some coal weakness. But those maintenance outages were expected?

Yes, we have outages in all of our plants and, yes, they were expected.

I just want to maybe clarify -- we are reaffirming our guidance for this year. What we are saying is in Q4 we will probably be at the lower end of the range of the $55 to $60 because we have two outages in one quarter.

Okay.

Again, I just want to clarify for everyone. These are outages of our HRSGs, which we have to take down for routine maintenance. So we lose the energy sales, as Fritz indicated, and then we incur the costs of all the boiler repairs when we take these pieces of equipment down. And so, I would say these are just normal, but we just have two in one quarter and so we're just flagging that to the people who follow us.

Okay, great. I want to follow-up on coal. I know you haven't finalized contracts for next year, but are there ever any escalators in the contracts just in case coal rebounds? Or is it once you sign, those contracts are locked and firm with no adjustments?

Locked and firm. I mean, they are only a one-year commitment. So that's your escalator, if you will. You come back and you look at it a year later. But we don't have any contracts like that. They are basically -- once we commit we're committed for a year.

And when should the contracts be finalized -- by the end of this quarter or during the quarter?

During the quarter. In general, what's happening is negotiations are kind of underway now. We would anticipate since we generally have to go out and be buying coal for January 1, you'd need to finalize negotiations in the month of November.

And how much does spot-market pricing is indicative of where contracts are people sort of looking at? How much of the spot market today -- the spot market is obviously very, very weak -- how much of that is a driver of the coal contracts?

A fair amount. If you just look at the down draft in pricing -- we have been selling some coals actually through the second and third quarter as prices have fallen. And what you have seen in spot and the changes in spot, you know, I think it is very representative -- it may not be the exact level that you would contract for, but it's certainly indicative of the reduction in prices than we may have seen from the prior year.

Okay, great. Thank you very much. Good luck.

Lucas Pipes, Brean Capital.

Thanks for all the detail on the coal side. I have a few follow-ups. Considering all the moving parts there, with idling some units, redeploying the equipment, upgrading the prep time, et cetera. Do you have a sense of where coal cash cost per ton should ultimately shake out in 2013?

We'll give you some more specificity on that when we put out our guidance later this year. What we are doing now today is really focusing on our mine plan, as I said, at least a 10% reduction in the actual level of cash cost. But the cash cost per ton, to be honest, if pricing comes in even lower we may take additional actions, which could lower production and we might actually source more in the market. So at this point it would be premature for me to talk about cash cost per ton.

And then on the mine idlings. Were there layoffs associated with those? And then, how quickly could you ramp up production if demand, let's say, were to return? And then are there any costs associated with maintaining these mines in a standby modus?

So far, base on the plan that we've outlined here, we would not anticipate any layoffs of our company employees. We have historically run with a fair complement of temporaries there. And so the temporaries have been taken out. And the reductions in the contract mines are really -- we're just not renewing the contract for a period of time.

So what we're trying to do -- we had to work really hard in order to try to attract and develop a workforce within our underground mines. And everything we are doing is about productively using that workforce and trying to take advantage of all the more variable tools to our disposal. And so at this point, we wouldn't anticipate any meaningful layoffs or any layoffs to speak of. And therefore we don't have any restructuring costs.

And in terms of the cost of maintaining them in a standby modus?

It's quite small.

Okay. Thank you very much.

(Operator Instructions)

Jason Brocious, KeyBanc Capital.

Good morning guys. Good quarter.

Thank you Jason.

I was just wondering, I know that the coal negotiations are sensitive now. I was just wondering if you could give us an update on where the Jewell Coke -- or Jewell Coal quality would price today in the spot market?

That's the sensitive item. So, no I -- ( Laughter). I'm not going to get into that today because I don't want to undermine our own negotiating position.

Okay. Where would a fair characterization of the coal be? Would it be like a low-vol or a high-grade mid-vol or --?

We're very high-grade mid-vol. Our coal that we mine in Jewell is one of the few coals that you could actually put right into the coke battery without even any blending. It's a very high quality mid-vol.

Okay, and have you guys, based on preliminary negotiations, any idea what customer nominations for volumes will be next year for coke? Should we model something like 2012?

We will update you on volumes when we put our guidance out. I think it's probably going to be in December, actually, as we look at the timing of that. We will be able to provide you more specificity around that in a little over a month.

Okay. And could you give us an update on the required CapEx spending that you guys have outlined previously as far as what's remaining in Indiana Harbor and Granite City? And the others?

I'll just let Mark once you -- you asked a couple of questions there. Let me just touch on Indiana Harbor's project spend and then we can talk about ongoing capital spending.

Indiana Harbor, we had outlined a plan to spend about $50 million to largely around oven repair and that work is underway. It's intended to improve the reliability of our ovens, it's intended to improve up times, it's intended to allow for more consistent and higher charge sizes and better yields. All of which is good.

It also has the benefit of having better environmental performance as a result of more liability. That project is underway. It is also important vis a vis the negotiations with ArcelorMittal on the contract negotiation to provide a high level of confidence of our ability to supply tons for another 8 or 10 years. That project is well underway.

On ongoing spend, Mark, why don't you touch on that?

So, for this year, Jason, we're indicating roughly $75 million of CapEx. About $50 million of that is going to be in our coke business. Approximately $30 million is kind of our ongoing CapEx. And then the rest is a combination of the spending at Indiana Harbor in this year, as well as some of the environments of remediation that we need to get started on later this year.

The rest, which is -- the rest of our spent capital spending this year is roughly $25 million. And our coal business, again, about $20 million would be ongoing CapEx. And then, approximately $5 million is for the work that we are doing on the prep plant to improve yield, as we go into 2013.

Okay. And as far as the amount you guys have outlined, as required environmentally, I think it was at Granite City -- what is the total there?

So, we outlined about approximately $100 million for both Haverhill as well as Granite City. In the S-1, we articulate that that is allocable -- about $67 million is allocable to Haverhill. That is being pre-funded as part of the MOP IPO, so therefore obviously the other $33 million is Granite City.

Okay, great. And just one more. Have you guys heard of any plans among your customers as far as what they might do with their company-owned plants, not the coke plants, given that industry utilization is now around 70%? Have you heard any plans about hot idles or just trying to lower production?

Nothing I can really point to today. Not with respect to their own internally operated coke plants.

Okay. And then as far as the interplay between, you know, what you guys supply and what they take internally, I mean, are there requirements on your contracts that would force them to take your output before their own?

Our contracts are long-term take-or-pay. Each contract is a little different, but all of them have take-or-pay.

You know, I think what we have seen, historically if you look at it, is our customers have taken our volumes, as you went through 2009, they basically reduced some of their own production. A number of coke batteries are idle today, actually. They do have ability to adjust their own production while continuing to take coke from us. That's historically what they've done. I can't point to anything today to suggest they're going to be taking further action, but they have been fully taking all of the coke we are producing.

I think at this point, operator I've got the message that there's no further questions. Let me close the call by thanking everyone for your interest today. I appreciate the questions and look forward -- there will be a couple of opportunities here, likely in the fourth quarter, to update you further on what's going on with our business. Thanks very much for your time today.

Thank you for participating in the SunCoke Energy third quarter 2012 earnings conference call. This concludes the conference for today. You may all disconnect at this time.