SunCoke Energy Inc (SXC) 2012 Q4 法說會逐字稿

Welcome to the fourth quarter 2012 earnings conference call. My name is Larissa and I will be your operator for today's call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded. I'll now turn the call over to Ryan Osterholm. Please go ahead.

Thank you, good morning, everyone. Thank you for joining us on SunCoke Energy and SunCoke Energy Partners predecessor fourth 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 our forward-looking statements in our SEC filings apply to the remarks on our call today. These documents are available on our website as are reconciliations with any non-GAAP measures discussed on the call. Now I'll turn it over to Fritz.

Thanks, good morning, thank you Ryan. I'm going to start off talking about SunCoke Energy results. Later Mark is going to review the results for SunCoke Energy Partners for both the fourth quarter and calendar year for a Company that wasn't public in the fourth quarter, but we wanted to update you at the same time.

And finally the end of the presentation, in December of 2012 we had our analyst meeting. We presented our guidance at the time. Today we're are reaffirming that guidance with respect to the operating metrics, EBITDA, and cash flow. But what we are doing is we're attributing the earnings and the EBITDA between SXC and SXCP, and also providing you the impact of the transaction on earnings. So we will spend some time tacking apart the guidance later on in the presentation.

Let me start off with page 3, with the fourth quarter and fiscal year 2012 earnings overview. The fourth quarter was another strong quarter for us, Middletown continued to perform well, Indiana Harbor also was approved year-over-year, and Mark will take you through some of the impacts at Indiana Harbor, specifically the effect of both the fourth quarter of 2011 as well as the fourth quarter of 2012.

Solid performance across our cokemaking fleet such that our adjusted EBITDA result was about $58 a ton in the fourth quarter. Coal, while slightly improved, remains a challenge really driven by the cost of [undermined] coal mining. And as we talked about in December, we have a lot of activity underway today in 2013 to both rationalize and rein in our cash cost and rationalize our mining footprint in Virginia.

Finally we delivered on both liquidity, where we generated $120 million of cash flow. We ended the year with about $240 million in cash and a virtually undrawn revolver. And that's before the impact of the IPO of SXCP. And we delivered on our 2012 guidance for both adjusted EBITDA, EPS, free cash flow and production levels.

Page 4, beyond the financial metrics, I would say our cokemaking operations and our SunCoke [lay] manufacturing system continues to bear fruit. The performance across the entire fleet, including Middletown, was strong.

As I look at Indiana Harbor, while it was improved year-to-year, it's nowhere close to what it can be. And for us it remains the single most important priority in our cokemaking fleet in terms of improvement going forward. The actions to optimize our coal business continue, not only have there been actions taken to date but I anticipate further actions in 2013 in order to reduce costs and improve productivity.

We'll talk about liquidity later, but we feel like our liquidity position and our capital structure is really in a solid position to support growth.

And finally in terms of growth, in 2012 we initiated our [AC entry] strategy. We expect to close that transaction in the first quarter of 2013. That transaction is what VISAs -- a venture called VISAs and coke. We submitted our permit application for potential new US coke plant in December of last year and several weeks ago we executed the IPO for SunCoke Energy Partners, our new MLP.

Turning it over to Mark.

Thanks, Fritz. So I would describe Q4 is a very solid quarter. And obviously, our 2012 is a great year relative to the guidance that we provided.

First, on the revenue side, we had coke sales of about 1.1 million tons in the quarter; 4.345 million tons for the year. Again Middletown is the primary driver of increased revenue in sales in the quarter and in the year. In fact for the full year, our tonnage is up 575,000 tons, of which approximately 528,000 tons comes from Middletown, the rest really from our coke fleet, maybe with the exception of Indiana Harbor which on a year-over-year basis is flat, then as Fritz mentioned we think more to come on Indiana Harbor.

We'll take you through the various walks on adjusted EBITDA later in the deck. But suffice it to say we achieved $69.7 million of adjusted EBITDA in the quarter. We're favorable on a year-over-year basis on coke, coal and corporate. And then we also achieved $265.7 million of adjusted EBITDA for the full year, which is up roughly $127 million and again will have a bridge later in the deck.

I did want to point out the upfront that we have amended the definition of adjusted EBITDA slightly. Previously we deducted the non-controlling interest associated with the net income of our minority partner at Indiana Harbor. As you'll see when we reaffirm our guidance later in the deck, it makes sense to start out with consolidated adjusted EBITDA and then to show the impact of minority interest of both Indiana Harbor and the interest in our public units as at the MLP.

The impact in the quarter was roughly $1.4 million, so relatively small. And then for the full year it's roughly $3.7 million favorable, again adding back the non-controlling interest associated with the minority interest at Indiana Harbor.

Turning to chart 6, we have the adjusted EBITDA bridge for the quarter. As you'll see, Middletown is really running on all cylinders. Plant is running really well and all of these startup costs and yield issues we had earlier in the year are now behind us.

At Indiana Harbor, you'll recall in Q4 of last year we had a $7 million billing adjustment and a $7.3 million unfavorable inventory adjustment, so net unfavorable last year of $14.3 million. Actually in this quarter, we recorded a $4.2 million favorable adjustment again related to 2011 billing.

As a result of the billing issues that we had in Q4 of last year, we went through a detailed audit of all billing with ArcelorMittal. And that analysis showed that we had indeed under-billed for approximately $4.2 million. All of these billing issues are now resolved and behind us. So I'd describe the quarter performance as primarily related to these one-time adjustments at Indiana Harbor, explains most of the $15.9 million delta.

Relative to the rest of our coke business we are showing a slight unfavorable result. Again when you look at the full year results, our coke portfolio other than Indiana Harbor and Middletown is favorable.

In the quarter you'll record recall we had two planned outages. We actually delayed the outage at Granite City at the request of the customer into Q4. We also had some outages that were unplanned related to Hurricane Sandy which hit us early in the quarter. So, slightly unfavorable in the quarter, but again, for the full year favorable.

Turning to coal mining, favorable on a year-over-year basis. I'll go through that in more detail. We do point out here that the Black Lung charge in Q4 this year was $2.6 million smaller in our coal mining operations than it was last year, and so that explains lion's share of the delta.

And then finally corporate is favorable partially related to Black Lung and the corporate portion thereof related also to Middletown startup costs that we had in the quarter before Middletown started production. And then finally we have some relo costs, relocation costs of our headquarters last year in Q4 that we don't have this year. So net/net favorable performance.

Looking at the full year results, again Middletown added $68.2 million. And Indiana Harbor, when you look at the nonrecurring items and the operating performance, contributed roughly $40.1 million year-over-year.

Again, I highlighted the Q4 one-time charges. You'll recall in early last year we incurred roughly $18.5 million of cover costs where we had to go and procure coke to make up the shortfall in production. We also had some pad coal and inventory adjustments in Q1 of this year.

So when you look at all of those together, they total roughly $32.7 million. Again the plant is running better on a full-year basis on an operating basis. The remediation project that we kicked off really in earnest late last year and we expect it to favorably impact results throughout the year.

On the rest of the coke business as I mentioned, all of our units ran strong. I would say the primary contributor among the remaining coke plants is really Granite City. But really we're very happy with the results across the entire coke portfolio.

And then on a full-year basis, in spite of the favorable Black Lung of $2.6 million we're slightly down on our coal results. Again I'll go through this later. Our sales are relatively flat here on a year-over-year basis, with really prices being up somewhat and cash costs being up on a year-over-year basis.

Finally corporate is favorable $15 million year-over-year. Much of this relates to the relocation costs, the startup costs at Middletown and the fact that we have actually allocated some more of our cost to our operating entities, and then somewhat offset by share-based and incentive comp costs for our standalone structure.

Turning to chart 8, we have the EPS bridge for both the quarter and the full year. Again we ended up at $0.39 per share in the quarter, $1.40 EPS on a diluted basis for the full year.

As we pointed out all year, the year-over-year comparison is unfavorably impacted on an EPS basis by the additional depreciation associated with the investment at Middletown. And we also have some accelerated depreciation at Indiana Harbor as a result of the refurbishment that's underway there.

Financing costs -- the year-over-year delta is somewhat smaller than the full-year delta. We now have kind of lapped the standalone capital structure. We did have some capitalized interest in Q4 of last year related to Middletown that results in an unfavorable financing cost comparison. And then, finally, taxes really reflect our higher income level in both the quarter and the full year.

Chart 9 really is a chart you should all be familiar with. It really shows our production and our EBITDA and EBITDA per ton associated with our Jewell Coke and other domestic coke business. First, on the production, again our production was almost 1.1 million tons in the quarter, up roughly 67,000 tons, 85,000 tons of which is attributable to Middletown. And I'd say offsetting that is Indiana Harbor which was down slightly on a year-over-year basis.

On an EBITDA per ton, again, we are reaffirming our guidance of $55 to $60 per ton. As I mentioned earlier, the change in our definition of adjusted EBITDA adds roughly $1.00 a ton. And so, again, we'll just hold to the guidance that we provided earlier of $55 to $60 a ton.

I might point out in the quarter that if you eliminate the $4.2 million adjustment associated with the Indiana Harbor billing related to 2011 that we would drop slightly below the $55 a ton. Again I would say -- I would characterize this as an unusual quarter where we had two planned outages and then some unplanned activity related to Hurricane Sandy. So, again, we feel very comfortable with the $55 to $60 a ton prospectively.

Turning to coal mining, adjusted EBITDA was up roughly $3.5 million from the $2.5 million reported in Q4 of last year. As I mentioned earlier we benefited from a lower end of year Black Lung adjustment versus the [$6 million charge] we took last year, of which $2.7 million was corporate and $4.3 million was attributed to coal mining. This year it was $1.8 million charge, of which $1.1 million was attributable to corporate and $0.7 million to our coal mining business.

On the operating side of the business, as you'll see in the chart, our year-over-year price is favorable. And that's offset by higher cash cost, which is in part attributable to a mix shift moving from reduced Harold Keene tons this year versus last year. This is where we have our high wall mining. And that really is attributable to the reduced output at Harold Keene associated with the fairly dramatic falloff in highball coal prices.

When you look at our Jewell on the ground cash cost, I would describe them as relatively flat to Q3. They are down slightly from last year. And then on a full-year basis, I think the commitment we made to investors is we do everything reasonably possible to stay roughly cash flow neutral in our coal business, and I think we have achieved that.

As we look forward into 2013, again, our commitment is to get to a Jewell undertone cash cost of approximately $145 a ton, and then a combined cash cost including our partnership with Revelation Energy of about $130 per ton. I would just describe that our coal action plan as well underway, and you know, we continue to see improvement here as we implement that plan. And I think Fritz will probably have some more to say on that later in the call.

Turning to our liquidity position on chart 11. As we indicated at our analyst day in December, we expected to end the year at roughly $240 million in cash. As you'll see here, we ended at $239 million. And that is -- we also have $150 million undrawn revolver.

When you look at the walk from the end of Q3, maybe I would just focus your attention on the middle of the chart where we cover the working capital and the CapEx. Working capital was very favorable in the quarter. I think we've indicated in our Q3 call that we had received a payment from one customer one day after the quarter end closed. Obviously that largely is driving the improvement in accounts receivable.

On the inventory side, much of that inventory reduction is attributable to reduced coal inventories at our plant. As you'll recall we have built a cool inventories in Q3 around some key labor negotiations at some of our plans as a contingency plan. And so we've been able to work those down here in Q4.

And then finally we've been able to reduce our consigned Coke inventory. This is the cover coke we purchased at Indiana Harbor in Q1 of last year. We reduced that by approximately $12 million in the quarter, and I'm pleased to share with you today that here in Q1 we have effectively sold all remaining cover coke, so we're actually out of that business now going forward.

On CapEx the quarter was $40 million. This is versus $80 million for the full year, so it was a fairly heavy quarter in terms of CapEx. And I would say it's attributable to basically the refurbishment which is underway at Indiana Harbor, the coal action plan including the work that we're doing at the prep plant, and then the outages at both Haverhill and Granite City.

Again, fairly heavy quarter; but we ended the year at $239 million in cash.

At this point I'd like to turn it over to Fritz to begin our discussion on SunCoke Energy Partners.

Thanks, Mark. Page 13 is a diagram of what is SunCoke Energy and what is SunCoke Energy Partners. Call it our box and triangle diagram. The triangle is just SunCoke Energy Partners, the MLP.

The MLP is 65% interest in two of our cokemaking facilities at Haverhill and Middletown. You can see on the chart about 1.1 million tons of call it pro rata capacity, because the capacity of those two plants approximately 1.7 million tons. 2013 estimated adjusted EBITDA of $88.3 million and about $61 million of 2013 forecast distributable cash flow.

The reasons to do the transaction were really two-fold. One to highlight the value of our cokemaking operations in terms of both their operating model, the business model; the nature of the underlying contract for the long-term take-or-pay nature of our agreement. And second, importantly, provide a tool that will have a lower cost of capital in order to facilitate growth going forward in our domestic coke business.

So that was work that commenced in early next last year. Our Board approved moving forth with the filing of the S-1 last summer. We went through multiple iterations. We postponed a launching our roadshow in December when the markets where choppy and we were pleased that we're able to execute the transaction in January and close.

Page 14 is the chart -- we spent a lot of time with investors on the road just talking about strategic goals roles of SXC and SXCP. The MLP itself, SXCP, is really the engine for our growth in the US and Canada, for the first steelmaking MLP when we look at it. So it provides the cost of capital to us which we think will allow us to grow going forward in a very positive way.

In terms of SunCoke Energy, what's the parent do? It -- well, first of all, in terms of the Kentucky plant, is in a position to build the Kentucky plant. At the conclusion of that project, if we proceed with it, SXCP would be expected to purchase at a set price.

And going forward, if SXCP were [classed], parent is in the best position in order to develop new coke projects. So that's first. Second, obviously, the role of the parent is to grow the international business for things like India.

Third, the parent houses the coal business. And our objectives here are obviously to optimize the coal business, rationalize it and bring our costs in line. And then finally the parent benefits through the growth of SXCP, both as a GP and Limited Partner and with the IDRs in the MLP.

Page 15 is our one-page summary of what the road show presentation was. But as we look at the strength of domestic CP, we start with modern high-quality assets supported by stable, long-term, take-or-pay agreements. We, the management team, is basically the same and the management system is the same in terms of the manufacturing systems.

There are certain levels of contractual support provided by the sponsor in the form of the Omnibus Agreement, which provides further support to SXCP. And again, we structure the transaction in a way that we think could facilitate growth of SXCP, particularly not only the structure itself, but the financial flexibility that's retained in SXCP. We under-levered business, we felt, relative to what the expectations might be in the future and we think it's in a good position in order to pursue growth projects going forward.

At this point what I want to do is turn it back to Mark and take you through the pro forma part of the [stat] metrics and the transaction.

Thanks, Fritz. So, I think we're very excited in terms of positioning both SXC and SXCP to grow our business domestically and internationally. And so what we thought would be helpful is just to show the pro forma impact of the transaction.

So we ended the year at SunCoke Energy or SXC at $239 million in cash, as I covered earlier. Approximately $73 million of cash will come back to the parent and $79 million will be left at SXCP, and then what will we show then is that in total that result in roughly $391 million of pro forma cash at both entities.

The $79 million in cash at the MLP is really pre-funding in full known obligation. So there's some sales tax, some tax credits that are due to customers of the MLP, and then there's some environmental remediation at the Haverhill facility, which again is pre-funded in full. So that $79 million in cash is spoken for, but really not be used up in full until the environmental remediation project is completed and that is estimated to take place in approximately 3 years.

We use this transaction as an opportunity to refresh the revolver at SunCoke. So we have a $150 million revolver that's now -- has a five-year runway in front of it and $100 million at SunCoke Energy Partners. So when you add the cash and the revolver capacity, we end up with total liquidity at SunCoke Energy of $462 million and $179 million at the MLP.

The majority of the cash from the MLP transaction was actually used to delever SunCoke, so you will see the total debt at SunCoke at $495 million. That's down from the $720 million that we will report at 12/31. We did borrow incremental debt of $150 million at the MLP, so a net deleveraging transaction.

And what you'll see here is would be EBITDA attributable to SunCoke, which we'll cover later in the deck, SunCoke has roughly 2.8 times leverage ratio versus 1.7 times at the MLP. It's just that we intentionally left the MLP with additional leverage capacity as we view this as our primary vehicle for growing our cokemaking business here in the US.

Turning to predecessor results on chart 17, we started off with the production and the financial results in the top half of the chart. And this reflects both the 65% SXCP interest and the 35% retained interest by SXC.

In the bottom half of the chart, what we do is we try to show a pro forma adjusted EBITDA attributable to SXCP, and you'll see there it's roughly $21.8 million. There's a very detailed reconciliation on page 36. I encourage you to go through that.

But in that reconciliation what we've effectively shown is that the $21.8 million of adjusted EBITDA attributable to SXCP on an annualized basis would equate to $87.2 million annually, and that compares favorably with the forecast which we cover on the next chart of approximately $85.8 million. So in Q4 our adjusted EBITDA at SXCP is actually running ahead of what we have in the 12-month forecast that we provided in the prospectus.

At the bottom of the page we show distributable cash flow. Again this reconciliation is covered on page 36. And what it shows is that we have distributable cash flow of $14.9 million versus minimum quarterly distributions of $13.2 million, which provides for a [1.13] times coverage ratio.

I would also point out that here that based on fairly heavy CapEx spending in Q4, if you pro forma the CapEx to the full-year run rate that we have in the prospectus, we would actually be at a 1.22 times coverage ratio.

Turning to chart 18, this chart was a chart we covered in our roadshow materials. Again it shows the adjusted EBITDA of $88.3 million. It shows our interest cost on the notes that we issued at SXCP. Again, these notes were issued at a 7.375% or [7-3/8] coupon. And that is favorable to the 7.75% we had assumed in our prospectus materials.

So net-net we end up with a 1.16 coverage ratio. Again, based on our Q4 performance which is favorable, on an EBITDA basis we would be running above these levels prospectively.

I'd just point out a couple of other things in the walk from adjusted EBITDA to distributable cash flow. So in addition to the interest cost, we have a non-cash accrual to replace assets of the end-of-life. And then SXCP will take 65% of the roughly $14 million in ongoing CapEx at Haverhill and Middletown, which equates to roughly $9.1 million a year. And then finally we'll have some direct public partnership expense which will be attributable to SXCP, which gets us to the $61.4 million.

With that I'd like to go back to the guidance section. I'll take you through the numbers and then I'll hand it back to Fritz to wrap up at the end. As Fritz mentioned earlier, I'm on chart 20, we are essentially reaffirming our guidance that we shared with all of you at our analyst day in late December of last year.

And so what you'll see here is the walk from where we ended the year at $266 million of adjusted EBITDA. We provided a range of $255 million to $270 million in our analyst day, with the midpoint of the range being roughly $263 million. So I'd say we ended up really in the middle of the range. And the attribution in terms of the walk from 2012 to 2013 is really unchanged with our full-year expectation of adjusted EBITDA of $205 million to $230 million.

Turning to the EPS walk, again we ended the year 2012 at roughly $1.40 of earnings per share. You back out the impact of the reduced 2013 EBITDA, the incremental depreciation associated with the investment we've made in 2012. And then we had pointed out during the analyst day we expect to have a roughly $0.14 impact of accelerated depreciation at Indiana Harbor related to the refurbishment. Again we expect this to be largely nonrecurring as we replace assets that we would amortize over 30 years at kind of the 15-year mark.

Finally, we have income tax effect and I would say this is based on the guidance tax -- effective tax rate we provided of 17% to 22%. So that ends up with a consolidated EPS of $0.60 to $0.85 per share, and this is identical to the guidance we shared again in December.

What we've done on the chart is we've provided an additional walk that gets you from consolidated EPS to EPS attributable to SXC. The first item is incremental interest expense. As a result of paying down SXC debt, we were amortizing some debt issuance costs over the life of that debt, which effectively we accelerate or get curtailed. That's roughly $0.05 to $0.06 of the roughly $0.08 delta.

And then finally there is a slight interest friction cost because we basically are repaying down term loan B debt at 4% and borrowing debt at the MLP at 7.375%. A portion of that interest costs is actually attributable to the SXCP shareholders and is shown in the next column where we basically identify the EPS attributable to the SXCP shareholders.

And the way I think about this is, a portion of our EBITDA is sold to the public unitholders. They take a pro rata share of the depreciation. They take a pro rata share of the interest cost associated with the debt issued at the MLP.

And then finally because our pretax earnings are being attributable to SXCP unitholders, we have a favorable adjustment to our tax provision. And I'll cover our estimated effective tax rate for the full year. So when you add it all up together, we end up with $0.30 to $0.55 attributable to SXC, with the remaining being attributable to our SXCP public unitholders.

Turning to chart 22, again, this is a summary of our guidance. What we've shown in the middle column is the guidance we shared with you back in December which we are reaffirming today. The column to the right of the chart really shows the attribution to the various shareholders.

So for example, on adjusted EBITDA, on a consolidated basis $205 million to $230 million. The $165 million to $190 million really will exclude the minority interest, the EBITDA attributable to minority interest at Indiana Harbor and the EBITDA attributable to SXCP interest -- public unit interest. We just covered EPS walk.

The next two items are the cash flow from operations and the CapEx. Again this is consistent with the guidance that we'd provided in December. We had actually provided a free cash flow number.

When we look at where the CapEx is being spent is whether it's pre-funded or not by the MLP transaction, we thought it was more instructive to just focus on consolidated cash flow from operations and then CapEx. We've detailed CapEx in the appendix on page 35. We've shown where the CapEx is being spent and then whether or not it's pre-funded by the MLP transaction.

And then finally, on the effective tax rate, as I pointed out earlier on the EPS walk, as a result of pretax earnings being distributed to public unitholders, the SXC tax provision is reduced. The cash tax rate is also reduced but not as dramatically, and really that delta really reflects some of the tax leakage associated with the transaction over time. Effectively we are providing full basis to the public unitholders on underlying assets which don't have 100% basis, so it results in some slight tax leakage over time which is reflective in the cash tax rate.

And then finally our coke and coal production are unchanged from what we shared with you back in December. With that, I'll hand it back to Fritz.

So, wrapping it up, thanks Mark -- on page 23 are our priorities as we look at them for 2013. As always in our business this starts with operational excellence. It's [stating] momentum in our coke plant, the coke plants -- executing our Indiana Harbor plant.

And that's really a three-part plan -- one, refurbishment project; second, resolving the NOVs that we have at the site; and third, renewing the coke contract. That contract expires with ArcelorMittal in October 2013. Discussions with ArcelorMittal have been ongoing for a reasonable amount of time and we are confident that we will reach a reasonable renewal of that agreement. So a lot of things going on in Indiana Harbor in 2013.

We begin implementation of our environmental project at Haverhill in Granite City. Executing the coal mining action plant in order to reduce our cash costs is a critical operating priority. And finally, underpinning all this is maintaining our top quartile performance in both safety -- excuse me, top quartile safety performance in both coal and coke.

Growing the business -- we think we're now very well-positioned to grow the business, obtaining a permit for the next potential US facility. I continue to do work on identifying and pursuing strategic acquisitions potentially, and then continuing to evaluate how we might use the MLP going forward is a priority for us.

And then internationally closing VISA SunCoke venture. Our objective again is to close that in the first quarter, and then look for opportunities to follow-on to grow the business in India with our partner.

And finally strategically optimizing the assets, first, obviously making sure we have a smooth launch in governance and operations in SXCP. Second is repositioning our coal business for -- to deal with the current near-term weakness and to provide us with the right long-term strategic flexibility. And finally, putting the balance sheet both SXCP and SXCP to work.

Our liquidity positions are strong, but we haven't deployed the capital to earn a return at this point. So our objective obviously is through growth and redeploy the capital we have at these businesses in order to grow our business going forward.

At this point I want to open it up for questions.

(Operator Instructions) Ian Zaffino, Oppenheimer.

Great, thank you very much. I just wanted an update as far as domestic plant expansion, where you are as far as discussions with your customers.

Good morning, Ian, I would say we've had ongoing dialogue with all of our customers with respect to the Kentucky project. This is a project where we submitted for the permit in December of last year. We wouldn't anticipate receiving that permit until late this year or early next year. So the dialogue, as we've had some ongoing dialogue, and I anticipate that will continue into 2013.

Okay, and then I know this is working a little bit far ahead here, but is the Kentucky plant the last expansion you would potentially do in the US or is it sort of like, yes, we have this Kentucky one, and once that's complete and signed up in full up, would you go to build another plant? Or do you want to go internationally? Or how do you prioritize, and how do you think about that?

Good question. First of all, I hasten to add -- I should that Kentucky location is our preferred location but it's not the only location. We do have some other alternatives. But we think it's a good location to support multiple customers, which is why it's our preferred location at this point.

What I would say is when we look at the approximately 19 million tons of capacity of coke in North America today, and then we then look at about 12 million tons are produced by our customers in coke batteries that are old and getting older, we look at that and even further look at the market in terms of the underlying blast furnace itself. We think there's about 4 million tons of capacity that will be taken out of production. When it happens is not a precise science but there's about 4 million tons at very, very old coke batteries.

So the Kentucky project is 660,000 tons. We're the only company to build a new coke plant in the United States, brand-new Greenville coke plant in the last 25 years. So I would say I don't think it's -- I wouldn't say it's our last plant. But what I would say is that growth is episodic, and so we'll maintain dialogue with customers.

The most positive thing we can do to grow our business actually is build new coke plants to support customers. That does -- it's chunky. It takes time to build a plant. But it generates substantial EBITDA and cash flow going forward as you've seen with Middletown.

So as I look at priorities, this is a high priority. But it obviously doesn't affect results in the next 2 to 3 years given leadtimes. So I would say it's our preferred location. We have sized it, we think, in an optimum way. We have dialogue with our customers.

But we're still -- we just look at it, there's like 4 million tons of very old coke capacity which is, we think, going to be in play in the intermediate term. So we'll just have to see.

Great, thank you very much.

You're welcome.

Andre Benjamin, Goldman Sachs.

My first question I guess is on the back of the last, just how you're thinking about a lift both in 2013 and in future years now that the restructuring is complete. I think at the analyst day you discussed the potential to use the MLP to potentially acquire other coke plants. Any thoughts on the attractiveness of the opportunities, willingness of sellers, CapEx needed, et cetera?

So I already talked about with Ian the 4 million tons of capacity that we think -- are coke plants that are just going to wear out and go out of business. Another 4 million tons of capacity that we think is newer and represents -- I'll call it our potential population.

We've had preliminary discussions with customers on the subject of acquiring coke batteries. There has been some interest. But as I said on the road show, when asked the question frequently, the customers have all said finish your MLP and then come back and see us when it's done.

Well, it's now done, so I would anticipate -- as I look at priorities of things that we can do to grow our production in the next 2 to 3 years, acquisitions are where you would do it, because building new plants won't generate volume for another 2.5 to 3 years. So, I would anticipate those dialogues with customers ongoing in 2013 with respect to the opportunities to grow.

Again, about 12 million tons of capacity we look at that's basically coke produced by our customers, about 4 million of which I think are batteries are going to wear out, another 4 million of which I think would be interesting opportunities to acquire. And then there's another 4 million that we're just not sure what'll happen with them. So that's how we look at the landscape.

Thank you. And then I guess as regarding the dual division, I apologize if I missed this detail in the walk, but it looked like the margins were down a bit quarter over quarter. Just wondering if you could discuss the driver of the variance and how we should think about that going forward given that that division has been pretty stable up until now.

I would say two things that impacted Jewell in the fourth quarter. First actually the impact of Hurricane Sandy actually hit.

If you look at production of Jewell it's $171 million versus the prior quarter, so I think Jewell was actually not only Jewell Coke, but Jewell Coal is where we had the impact of Sandy. We lost power. So we had two days where we were pretty significantly disrupted in our operations. That was one.

And two, we had lower cost to market. So the coke that was in the pipeline at 12/31 we basically repriced it as of 1/1. And we had lower cost to market which affected the fourth quarter margins. The impact of lower cost to market was about $700,000 which affected the profitability in the fourth quarter as well.

Thank you.

Garrett Nelson, BB&T Capital Markets.

Hi Fritz, and Mark. I apologize. I have another strategic question for you. You had the VISA Steel JV and the potential Kentucky plant. But are you also planning to drop down additional interest in existing coke facilities from the C-Corp into the MLP? And if so, what might be the timing on that? I'm just trying to better understand the distribution growth potential of the MLP.

Garrett, thank you, no need to apologize. You just asked the number one asked question during the road show. And what I would say is we have no plans today to do future drop-downs.

There are a number of reasons this. But recall -- we were born from a tax-free spin. As part of that we made certain representations and we had certain agreements with Sunoco that we would take no action that might potentially taint the nature of the tax-free spin.

The transaction that was done, the public offering of SXCP and 65% of the two plants, we were highly confident would not put at risk the tax-free spin. As a matter-of-fact Sunoco approved the transaction. We delivered an opinion to them. But we don't have plans today to drop further assets down, mainly because we are limited as to the degree to which we can quote, restructure the business, end quote.

I would say -- the last point I would make on this is that tax -- the tax indemnity in the tax-sharing agreement is a two-year agreement that dates to the spin date. So we entered into it January of 2012 and that expires January of 2014. After January 2014 we're free to take whatever actions we think is in the best interest of shareholders.

I see. That's all I have. Thanks very much.

Thank you.

(Operator Instructions) Lucas Pipes, Brean Capital.

Good morning everyone. (multiple speakers) I just wanted to touch base on Indiana Harbor really quickly and if you could maybe give us an update on where you stand in the contract negotiations.

So, we began dialogue with ArcelorMittal and with SunCoke Energy, which runs the backend of that plant, last year. We have completed the engineering study. We commenced the project. The project itself with respect to the ovens is about $50 million to $60 million, which is a number that we've talked about with investors in the past.

As we've engaged in dialogue with ArcelorMittal, there's some chance we would spend more than that in order to provide a higher assurance level regarding volume longer-term. That will be dependent upon what the ultimate agreement might be with a customer and who would get a return on that capital.

We shared our engineering studies with ArcelorMittal. They are reviewing those today -- not literally, but they're actually doing that early in 2013. They've got their own engineers looking at it because whatever we spend, we would anticipate earning a return on it.

As I looked at it, I was asked this question a lot through 2012. The contract expires in October of 2013. I don't think it will take until September of 2013 to reach an agreement. But when you have something like this, it doesn't necessarily happen early, either.

I'm highly confident we are the principle source of coke for our customers' most strategic asset. We're their low-cost source of coke. We're the highest quality coke for that blast furnace. So I'm quite confident we will reach an acceptable and reasonable outcome in the contract negotiations. But it's -- the contract doesn't expire until October. So, never let a good deadline go to waste.

So I would say, as I look at it, I think this is something which could reasonably be expected by midyear this year. But obviously we each need to reach an agreement with both ArcelorMittal as well as Coke Energy.

I'm -- we've made very good progress with them. We've shared a lot of information. But it's just not done yet, and frankly think a lot of that's driven by the fact that it doesn't expire until October of 2013.

That's very helpful, thank you. And then on the coal side, could you remind us on the various steps you're taking to lower costs there, and maybe just also a reminder on how you think about this business long term? You mentioned in the presentation earlier that this is a core focus of SXC. So kind of how should we think of this if met coal prices stay relatively low?

So, first is -- we've been consolidating mines. And the plan is -- would involve us purchasing more coal, either purchase coal or more importantly, actually leveraging the venture we have with Revelation Coal which is a lower cost source of mid-vol met. So that first step is will be sourcing more through Revelation and/or purchase, and then mining less, and so therefore implementing in mine consolidation which takes costs out.

Second is we have made some investments in, particularly in the fourth quarter, if you look at coal capital spending in the fourth quarter, that was spent in the prep plant. The objective there, our prep plant was quite old, needed some improvement and frankly it's costing us yield. And yield is the most important thing we can do in order to drive down cash costs, actually.

So the prep plant itself we anticipate -- the work has been done. It's basically in fine-tuning now and we anticipate that we should see an improvement from our 66% reject rate we saw in the fourth quarter. So, the second part of this is yield improvement.

Third is maintenance. Over the last two years we've had a pretty concerted effort to upgrade the equipment fleet. We had very high maintenance costs at Jewell, mainly driven by -- I'll call it the ancient nature of our mining asset base. We have pretty much either refurbished and/or replaced number of our continuous miners, our shuttle cars, our man trips, our roof bolters. And we think that will bear fruit in terms of lower maintenance costs.

We will have lower licensing fees, just simply driven by lower price of coal, and finally, we continue to look. We're not done with the coal action plan. I would say we continue to look for opportunities to further rationalize our mine base.

The focus and the metric is cash costs on the underground, because we know that our cash cost source -- with coal source and Revelation is competitive even at the low price environment we are facing today. So obviously our objective must be to continue to reduce our cash cost of our underground mines. Those are some of the key steps.

And I would say we're not done yet. This is something that I think we anticipate -- we do anticipate completing the large -- the lion's share of the work early this year, call it the first quarter.

And in terms of the 10% cost reduction I think you outlined during the investor day, is that incrementally, then, throughout the year?

Well, I would say yes. It is 10% reduction in the numerator of the cash costs relative to 2012. We're on path to achieve that, and my objective actually at this point, given where we see coal prices, would be to go further than that. But I don't have anything that I can update you with today.

That's very helpful. Thank you a lot.

We have no further questions at this time.

Okay, I want to thank everybody for listening, for participating today and I'm grateful to put 2012 behind us. It was a good year, but we're very much excited about the opportunity we have for us in 2013. Thanks very much.

Thank you ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.