SunCoke Energy Inc (SXC) 2014 Q1 法說會逐字稿

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

Thank you. Good morning everyone. Thank you for joining us on SunCoke Energy's first quarter 2014 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, we will be taking questions on our first quarter results. However, since SXCP is currently in registration for an offering of common units, we will not be taking any questions with respect to SXCP or any equity and debt financing related to the drop-down transaction. This conference call is being webcast live on the Investor Relations section of our website at www.suncoke.com. Thereby 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.

Before I turn over the call to Fritz, let me remind you that the various remarks that we will make about future expectations constitute forward-looking statements, and the cautionary language regarding forward-looking statements in our SEC filings apply to the remarks on our call today. These documents are available on our website as are a reconciliation of any non-GAAP measures discussed on the call.

Now I would turn it over to Fritz.

Good morning. Page two is a summary of the first quarter 2014 earnings. This quarter when you look at adjusted EBITDA down from $52 million to $33 million. It was a challenging first quarter. The Indiana Harbor performance was weak, due in part large part because of weather impacting both the production and the refurbishment that we had a combination of things that effected us in Indiana Harbour which significantly depressed our production volumes, increased costs, decreased yield.

And apart from Indiana Harbor, the same factors affected the rest of our coke fleet. We were down about $7 million versus expectations apart from Indiana Harbor, driven by weather related impacts and yields, volumes and costs. So just EBITDA down. The EPS loss of $0.11 reflects both the weak adjusted EBITDA, and then accelerated depreciation in the Indiana Harbor as we're completing the project, making decisions about assets to maintain and service, as well as assets to take out of service, we have accelerated depreciation on some assets in that regard, and then we're also, Mark will take you through this a little bit later in the presentation, taking a different approach to our ongoing floor and wall repair, that we would have done relative to how we have handled it in the past, which will also result in some accelerated depreciation in Indiana Harbor, so it affected the first quarter.

Relative to our 2014 guidance our original guidance was $230 million to $255 million. Based upon the start that we have had to the year, the weaker start we've had the year, we're adjusting our EBITDA outlook now from $220 million to $240 million, so it's narrowed a bit, and down relative to both the top and the bottom of the range. The bottom of the range moving from $230 million to $220 million, and the top of the range moving from $255 million to $240 million.

We have already initiated and have completed a restructuring at the corporate level. This related to corporate costs, reduced our manpower at the Lisle headquarter location about 10% relative to where we see, coming into the year. We've also taken some action to reduce out other out of pocket spend. This is done for two principal reasons. One with the catalyst of the announcement on the coal transaction and the expectation and our objective to sell the business, we felt like we needed to get ahead of what would be a problem in terms of corporate costs because we allocate corporate costs to our business units, and we didn't want to get behind the eight ball preemptively, we took action in the quarter and actually into April to restructure our corporate staff about 10%, and then reduce spending so that as the dust clears and we move into next year, we feel like we wouldn't have any negative effect of corporate cost as a result of the divestiture. That was one.

Two, it's always a good idea to look at your structure to make sure that you are as lean as possible, and the Company itself has been public not quite three years, and we thought a reasonable opportunity for us to look back and say are we pursuing our corporate activities both governance as well as supporting the plants in the most efficient way possible. We took a charge in the quarter of about $1.4 million related to the restructuring activities. Finally, I will have a chart on this next. We did announce and are executing the first drop-down transaction, the agreement was actually executed for $365 million in total consideration for a 33% remaining interest in Haverhill and Middletown, which I will cover on the next chart.

Page three. We spent a little bit of time since we're not taking questions about this on the call, I will spend some more time on this than I might normally spend, but I want to try to make it as clear as possible what the transaction is all about. First and foremost it's the first drop-down transaction that we will have participated in. Recall when SXCP went public, we dropped 65% of the interest in the Haverhill and the Middletown assets into the MLP. This transaction will move another 33% of those assets into SXCP.

What that brings to SXCP is about $44 million of adjusted EBITDA. Net of an incremental $5 million of corporate costs that we're allocating as part of this transaction. The consideration for that 33% interest is $365 million, which is approximately an 8.3 times EBITDA multiple. Again, that's 8.3 times relative to the 44 roughly, net of the incremental corporate costs. This transaction was approved by the conflicts committee of the SXCP Board. So this is the first time we have been through this process. The consideration, how the transaction is financed, there are two things going on in the transaction at this time. One is the drop-down transaction, and two we're taking some measures in the SXCP balance sheet, particularly with respect to the revolver to term out and replenish our revolver.

So the amount of financing that's being raised in order to accomplish the drop-down transaction section for this is actually more than required for the drop-down transaction, because of what we're doing on the SXCP balance sheet, but let's start with the first step of the transaction is SXCP will assume, and then immediately repay $271 million of SXC debt. So the SXC level of indebtedness will decline by $271 million roughly as a result of the transaction. SXCP will also issue to the parent $80 million, or roughly $2.7 million additional common use as part of the transaction. So relative to the units that are being offered to the public, think of it as roughly half would be taken back by the parent and half would be offered to the public.

The parent also receives an additional $3 million General Partner interest. And then receives $3 million of cash, net of $7 million that is actually repaid to SXC. So beyond the drop-down transaction the additional financing being raised at SXCP is intended to first term out the $40 million draw we have in the revolver. Last year when we closed on the KRT acquisition, we used cash and we drew on the revolver to finance that acquisition. As a result of debt that we raised at SXCP, we would term out that revolver and basically replenish it, move it back to zero, and then the additional funds are being paid to both put some cash in the balance sheet and pay the transaction fees. So that's the transaction in a nutshell. At the bottom of the chart you can see to SXCP when the transaction is done, we anticipate about a $23 million increase in distributable cash flow at SXCP.

At this point, I would turn it over to Mark.

Thanks Fritz. As Fritz mentioned up front, Q1 was a weak quarter which came in well below our expectations. Adjusted EBITDA was down about 36% in our domestic coke segment, you will see adjusted EBITDA deteriorated from $62.7 million to $48.6 million in the year, really driven by two principle factors. Weak Indiana Harbor results, in fact we had a loss at Indiana Harbor of $6.6 million on an EBITDA basis, which is well below expectations. And then across the entire cokemaking fleet, weather impacted both yield reliability and to some extent operating costs, and here about $7 million below our expectations. We will cover in more detail, but Indiana Harbor continues to make progress from Q1 and the rest of our Coke fleet is essentially back to normal production levels. And Fritz will cover that at the end of the call.

On our coal business the loss continues due to price headwinds. Adjusted EBITDA a loss of $8 million, down roughly $3.4 million, again primarily on deterioration in price, down $22 per ton year-over-year. We are continuing to make improvement in cash cost per ton of $9 in the quarter, and finally we have engaged advisors to help us in launching the sale prices of our Coal Mining business. As Fritz mentioned earlier, we did launch a restructuring in Q1 and there's a $1.4 million charge in the quarter.

Turning to chart five, which is our adjusted EBITDA bridge, again, we recorded $33.6 million adjusted EBITDA versus $52.3 million last year, and the deterioration really results in, again Indiana Harbor being down roughly $3.9 million, primarily on volume and that was partially offset by a higher fixed fee, as a result of the recently-negotiated extension in the Indiana Harbor Coke contract with ArcelorMittal. Our domestic Coke fleet was down approximately $10 million on a year-over-year basis. Again about $7 million in volume and $4.6 million in lower yields. We did have slightly higher energy results, or slightly better energy results year-over-year. Our larger [rig] as a result of higher prices in part due to the very extreme weather that we had in the quarter. And again, in terms of production Indiana Harbor was down about 65,000 units, and the rest of our Coke fleet was down approximately 43,000 units on a year-over-year basis. So that explains the volume.

Turning to International Coke approximately breakeven in the quarter. Brazil flat and our India JV slightly above breakeven. Our Brazilian assets are ramping up to full production in April, and so we will expect better results in Brazil going forward. On Coal Logistics this is a business as you know we acquired in Q3 and Q4 of last year. so Coal Logistics is accretive because we didn't have it in Q1 of the prior year, but again our results are below expectations by about $2 million with respect to weather-related costs, primarily lower throughput at our Lake Terminal and higher costs at both KRT and Lake related to operating in extreme weather.

Coal Mining I mentioned earlier and we will cover in more detail was down $3.4 million, and then finally corporate costs are unfavorable roughly $3.3 million, again about $1.4 million of that is explained by the restructuring charge we took in the quarter, and in Q1 of last year we had favorable gains related to our India rupee hedges of about $0.9 million. The diluted EPS bridge on chart six in Q1 we reported a loss of $0.01 per share. The lion's share of that is driven by the lower adjusted EBITDA that I just took you through. Additionally, higher depreciation year-over-year with Indiana Harbor accounting for about $0.04 of accelerated depreciation in the quarter. Again, we have more detail later on on Indiana Harbor, which will explain what is going on here.

On interest expense it's favorable. We did have some financing costs related to the IPO of SXCP in Q1 of 2013 that are not repeated this year that largely explain the delta in interest expense, and then finally, taxes are favorable in part because of lower earnings, but also because we had a number of unfavorable state and local tax items in Q1 of 2013, as well as a Sunoco tax sharing true-up, which again not repeated in Q1 of this year.

Turning to chart seven, we achieved adjusted EBITDA per ton in domestic Coke of $49 per ton. This is below our guidance of $55 to $60 per ton. Again, largely on account of production being down across the fleet, as you will see in the left hand side of the chart by about 107,000 tons, and also I just remind everyone that our adjusted EBITDA per ton includes the loss at Indiana Harbor which equates to about $7 per ton.

So turning to chart eight, I would like to give a little more detailed update on Indiana Harbor. The refurbishment product on the ovens is completed and we expect the delivery of the pusher charger machines, or PCMs as we call them in Q3 and Q4. Based on spent and committed we expect that the project will be completed for $104 million in capital, and I just want to remind everyone that this project was really to address the replacement of the doors, lintels, buckstays, and tie rods associated with the ovens. So sort of the exoskeleton of the oven if you may, as well as address some of the infrastructure assets, mainly the coal sheds, and two new pusher charger machines. As a result of the project, in Q1 we identified the need for oven floor and flue replacement on about 80 ovens, and so at this point we're estimating that we will need to spend an additional $15 million in capital and $5 million in expense, and these numbers are now reflected in our full year guidance that I will cover later on.

As a result of the full replacement of certain oven floors we're expecting roughly $10 million of accelerated depreciation related to the internal oven work that was not included in the initial Indiana Harbor project. I would say the replacement of oven floors in this manner is we believe better and more cost effective than the traditional silica welding that we would typically do on an ongoing basis. So it's a more effective replacement strategy. We also believe that we will gain some benefit in terms of lower maintenance going forward and higher production levels, i.e. higher charge rates potentially as a result of the oven floor replacement. Finally, we had planned to retain roughly two pusher charger machines, of the four existing pusher charger machines, and we have decided that it makes more sense to scrap all four, so there's and additional $8 million of accelerated depreciation. So between oven floor replacement and the scrapping of all of the existing PC Ms there is roughly $18 million of accelerated depreciation that we will see this year that wasn't previously forecast.

Turning to chart nine, the outlook for Indiana Harbor. As you all note in the chart, we saw a fairly dramatic drop-off in daily production levels in January but we are pleased to announce that we're starting to see early signs of improvement as we go through April. Through April 20 we're at a rate of roughly 2,800 tons per day, and we expect as shown in the lower chart that this will continue to ramp-up throughout the year, and we will really reach full production levels of 3,400 tons per day by Q4.

We have been notified of an outage at ArcelorMittal, and I think our plan today will be some combination of inventory build or deferred payment terms, as we continue to ramp-up production. I.e., we will not slow production in Q2 so that we can complete the ramp-up of this project. Finally, based on a weak start in Q1, the improvements we're seeing in Q2 and the ramp-up to full run rates by the end of the year our expectation is adjusted EBITDA will come in somewhere between $20 million to $25 million, but will be largely second half loaded.

Coal Mining financial summary on chart ten. Again, this shows that our adjusted EBITDA deteriorated to about $8 million loss, down around $3.5 million year-over-year, driven primarily by a dramatic price decline in our delivered coal price from $121 per ton last year, to $99 per ton this year. What you will also notice in the chart is that we continue to make improvements in our cash cost per ton we're down $9 in the quarter, in effect we exited the quarter at approximately $110 per ton. We're maintaining our guidance to a loss of $20 million to $30 million in our coal business, and as I mentioned earlier we have launched a sale process. What we have seen in our coal business is an improvement in both a number of the operating end cost metrics, including the reject rate which you will notice was at 68% in the quarter.

On SXC liquidity we ended the quarter with consolidated cash of $178 million, with adequate revolver capacity at both SXCP and SXC. As Fritz mentioned earlier as part of the drop down transaction, we will be replenishing the SXCP revolver which was drawn when we purchased KRT. In addition to the net loss we took in the quarter it was a quarter in which we had fairly significant consumption of cash on the working capital front, and Accounts Payable again were largely on timing, down about $18 million. We did make a $13.1 million payment of accrued sale discounts to a customer. This was discounted versus some nominal value so there's a small gain related to this, and then in addition in the quarter we have our bond interest payments, so typically Q1 and Q3 we see these outflows. Finally, we had extended payment terms to one of our customers in Q4 through Q1 and this was repaid. So there's a favorable receivable impact of about $20 million in the quarter.

On CapEx, again, we spent roughly $14.7 million at Indiana Harbor on the refurbishment, versus a full year expectation of about $24 million. Ongoing capital of $12.8 million versus full year ongoing expectation of about $65 million, and then the environmental project, the remediation at Haverhill continues about $10.6 million spent in the quarter. And then finally we do have distributions, Q4 distributions to our SXCP unitholders of approximately $6.4 million. Again, we feel we have adequate liquidity of our taking steps to replenish the SXCP revolver.

Turning to chart 12, this is our full year guidance. As Fritz mentioned, we are adjusting our EBITDA guidance to $220 million to $240 million. So if I look at the mid-point of the range, we're down approximately $12.5 million versus I would say being down approximately $20 million versus our expectations in Q1. So there is some expectation here that as we go throughout the year, we will be able to regain some of what we lost in Q1.

I will take you through the EPS walk in a minute on the following chart, but as a result of the reduction in EBITDA and the accelerated depreciation at Indiana Harbor our expectation is EPS will be somewhere between $0.08 and$0.33 per share. Again, as a result of lower earnings, our expectation is cash flow from operations will be about $160 million versus our previous estimate of $170 million, and then based on the capital that we're spending at Indiana Harbor on the floor and flue replacement, our expectation is our ongoing CapEx, our CapEx in total rather, will come in at roughly $138 million for the full year. The rest of our guidance other than our domestic Coke production remains largely unchanged.

Finally, on chart 13, this is a walk to our current guidance of $0.08 to $0.33 from our prior guidance level, and what you will see is in addition to the EBITDA reduction, our expectation is that accelerated depreciation at Indiana Harbor will be approximately $0.26. Again, that is roughly $18 million related to both the floors and flues, and the write-off of the two remaining pusher charger machines. Interest expense will be favorable year-over-year. That's a combination of lower debt and mix of debt, as well as some capitalized interest on the environmental remediation project at Haverhill, and then finally taxes favorable roughly $0.09, largely as a result of our lower earnings.

So with that, I will turn it back to Fritz to wrap up the call.

Thanks, Mark. So sitting here in April thinking about the rest of 2014, what are our priorities? Starts with operations excellence as it always does, maintaining our top-quartile safety performance in both coal and coke. Getting the plants back on track, want to spend a minute here, extremely important obviously.

At our Analyst Day in March, we had estimated that our results in the first quarter would be down, adjusted EBITDA results would be down relative to targets of $10 million to $15 million. Those of you who were there probably would recall, I said $15 million was the better estimate. First quarter we came in about $20 million less than our targets. That $5 million delta as I think about it, a part of is just a weaker March, and frankly the weather continued to affect us particularly at Indiana Harbor, but it was a little weaker than we thought, and then we did take the restructuring charge which we felt was the right thing to do, but we had contemplated that when we met in March, but the first quarter is behind us, and it's about getting the plants back on track.

Mark has already showed you what has been accomplished through April, in terms of our daily rates of production so I think what we've seen in April relative to our expectations in the 2Q and for the year is supportive of the plan that we have outlined for the rest of the year at Indiana Harbor, and relative to the other plants, is we look for example in the second quarter at levels of production we think will be about 50,000 tons higher in the second quarter than we were in the first quarter, so sequentially we will be up about 50,000 tons, again these are the rest of the Coke plants without Indiana Harbor, and would put us at a level in line a little bit less than 2013 second quarter, but in line with pretty much in line with 2013, and frankly in line with our target. So as we sit here in April, we feel good about that. Obviously we need to deliver it, but as we think about operations it's about putting this behind us and getting our plant operating back to what they are capable of doing.

As we think about learning from the winter, three things you would say. Obviously one it was severe, and so that affected us pretty significantly. We are getting back on track. And the third is, we have learned history shows that those who do not learn from their experiences are destined to relive them. Historically we would winterize a plant based upon an expectation of standards, and that's how we have historically winterized our plants on coke. This year obviously that was not sufficient. One of the things we learned and we're implementing into the future is a different approach.

We will still winterize our plants for an expectation of a normal winter, and then we have a fallback plan frankly, that we've learned at some of our plants we're taking these steps at the rest of the plants, so that we can share the lessons learned, is that you can actually anticipate, I mean you can't anticipate everything, but if you anticipate prolonged periods of zero and sub-zero weather, that there are additional measures you can take on an incremental basis. There's a cost to it, but rather than try to winterize your plants to a higher standard on a permanent basis, you basically have a Plan Bthat you would implement, if you see even more severe winter weather coming, and that's what we plan to adopt as we go into this upcoming winter, and in the future. So we tried to learn from the experience.

And then finally, executing the projects we have on our plate, whether it's the project we have at Indiana Harbor, finishing the project we have at Indiana Harbor and the refurbishment, and as Mark talked about, the approach on the floors and the flues, is frankly a better way of executing this than in the past where we would basically silica weld and expense. It's a different design, and frankly it provides for both lower maintenance, as well as better charge weights in the future. So it's just a better approach to handling something, but at 80 ovens that's higher than we would typically have, so we realize it's to some degree the ovens we need to repair, you can look back and think about all of the things we have been doing at that plant and then the winter we've gone through, and then we've got more ovens to repair than we would typically have. And then in executing the environmental remediation project particularly at Haverhill we have some important steps, important measures that we're going to be taking this summer.

In terms of driving growth, we have been continuing to work on permitting our new Coke plant and fanning out. We are fanning out talking to customers about this, and we haven't got the final permit yet. We have submitted comments to the public comment letters. We are now waiting on the final permit. So with that we actually think we would then, assuming we receive that we would be in a position to be in dialogue with customers. Again, we're not going to launch any capital associated with this plant until we get 60% to 70% of that plant signed up. So that's work as we think about the primary gating item for a new coke plant today, it's really customer commitment, and it's something we plan focus on for the rest of 2014. And then leveraging SunCoke Energy Partners to pursue further opportunities in cokemaking, Coal Logistics, and entry into the Ferrous value chain.

Finally, in terms of optimizing the business and the capital structure, we're pleased to be moving at the pace we're moving in the first drop-down transaction to SXCP, and the related financing associated with that. We have been trying to move this along. You recall the tax sharing agreement expired the 18th of this year, at Analyst Day we talked about what our game plan would be, in terms of longer-term dropping our entire domestic Coke business into the MLP and proceeding with a first drop-down transaction, and we're pleased to be doing that in the month of April, and then to close in May, and then finally also moving on in terms of the future of our Coal Mining business, and pursuing a strategic exit as Mark talked about, have we retained advisors that process is moving and moving quickly, we plan even with the challenging environment in coal, we think it's the right thing for us to do to move forward with the exit from that business at SunCoke Energy.

Those are my comments, at this point, let's open the line for questions.

Thank you. We will now begin the question and answer session. (Operator Instructions). Our first question comes from Neil Mehta, Goldman Sachs. Please go ahead.

Good morning.

Morning, Neil.

Morning. First can you talk a little bit about the M&A landscape, as you talked about driving growth at your Analyst Day you highlighted about a dozen smaller sized M&A opportunities. Where do you stand in that process, and which verticals seem the most promising, and which verticals seem the least promising?

I would say, I will have Mark answer the question, but one of the things I would say, Neil, is we've been the last certainly 30 to 45 days we haven't been working hard about the drop-down transaction, as well as getting our ducks lined up on coal, so relative to Analyst Day, as I think what we've been doing for the last 45 days we've been working on those two. I will have Mark talk about the prospecting that we're doing on M&A.

Yes. Thanks, Fritz. So I think on Analyst Day I think we outlined some of the areas where we believe there are M&A opportunities. I would say we still continue to believe that Coal Logistics add-ons are likely the most feasible in the short run, and we adopt comment on specific initiatives, but we are very active in this area, looking at a number of opportunities really around the terminaling business or logistics, or Coal infrastructure assets more generally. Beyond Coal Logistics I would say we do have an interest in certain cokemaking acquisitions, but we think these are likely to be episodic over time, and then finally on the ferrous front we recently received the ruling on beneficiation and pelletizing. We have submitted the ruling on DRI. We are awaiting dispensation on that. And we believe there are opportunities there, but I think those will take a little the bit longer to achieve.

Then in terms of the sale of those coal assets, other companies in the industry have had a challenge in selling their metallurgical coal assets. If finding a seller is challenging, how would you if there is still a path to exiting the business?

So finding the seller is not the challenging. It's the buyer. I think that's what you're referring to. I would say a couple of things. We will have a backup plan in the event that we're unsuccessful. I want to talk about our outlook in that regard, but our plan would be if we're not successful as we would significantly downsize further. In order to try to meet only the needs of the Coke plant, and then over time even rationalize that.

So it just wouldn't be done immediately, because in the end we still need 1.05 million tons to go into the Coke plants and some reasonable portion of those tons should come from logistically the mines that are very close by. So the fallback plan would be to minimize the absolute level of adjusted EBITDA loss and cash that needs to be,- the cash that would be burned in the business while you rationalize it over time. That's the fallback plan. Now, the principal plan, as you think about it, we are surrounded by strategics. If we think about $110 of cash cost, with our exit rate in March, and with our goal really for 2014, we think that if our mines were combined with someone that had significant scale, they could take another chunk of cost out of the above-ground costs, call it another $5 to $10 roughly. This is something I reviewed at Analyst Day.

And then lastly a more efficient prep plant located better, in a better location to the mines is probably another $10, which as we think about $90 of cash cost for deep room and pillar, mid-vol coal is certainly a much more competitive level than what we have been at. The asset itself we have an off-take agreement that we could offer. We do the prep plant, and then offer it on an off-take basis, and then put it into the MLP, and lastly, we are very flexible on structure.

It's to the like we need to do this transaction to raise cash. So we could take our consideration in multiple forms. I think we have got, we've had quite a bit of in-bound interest, but obviously you need to be able to translate that into a transaction, so we're early in the process, but I think we believe we have both the asset, the opportunity, and the openness to a transaction that would allow us to get this done, and that's what we're going to work on in 2014.

Great. And last question in terms of the timing of the final permit for the new Coke plant, what is the milestone we should look out for?

I think we're expecting it any time now. We did submit in the first quarter actually near the end of the first quarter we submitted all of the responses to the public comments. The public comments from actually pretty straightforward, and now it's just grinding through the system. In the meantime the dialogue, all five customers for blast furnace Coke, three of them are already our customers.

So we've been talking with the customers about what we're doing here, what we might be prepared to do, the kind of terms we could offer, it's a multi-plant which would be different. I mean historically to a steel making customer who has dealt with us, they have signed up for 15 or 20 year terms for 550,000 tons, we don't believe that one customer is going to take 550,000 tons. We think this plant is likely to be multi-customer. I think that the really serious discussions can accelerate as we have that permit in hand. I would say lastly we're using the time to finish our engineering work, because generally when we sign up a customer, at that point the capital risk is ours. So we want to try to finish the engineering work to try to minimize the risk we might have, that the project costs would be higher than we expect.

Makes sense. Thank you very much.

You're welcome.

Thank you. Our next question comes from Lucas Pipes from Brean Capital. Please go ahead.

Hey. Good morning everybody.

Hi Lucas.

My first question is actually a pretty straightforward simple one. So in terms of your adjusted EBITDA guidance for Indiana Harbor, $20 million to $25 million, does that include the floor replacement, et cetera, expense of $5 million?

Yes.

Okay. That's helpful. So with that, when I think about your guidance change for 2014, Indiana Harbor essentially unchanged from where I had it previously, what do you think are the big kind of levers that caused the numbers to come down a little bit?

I would say Indiana Harbor is a little weaker. I am not sure about your expectations but certainly versus our expectations. Second is the rest of the plants actually did have a weaker first quarter start, as did Coal Logistics and coal itself. So we basically as Mark said, just take the mid-point of that range down about 12.5. We were down about 20 in the first quarter relative our target, so think of it as putting in roughly half of the first quarter miss into the guidance range.

Okay. That's helpful. Appreciate that. And then on the CapEx side. So your environmental projects and then Indiana Harbor refurbishment are going on. Should we essentially expect all of that to be completed this year, so that going into 2015 essentially you would be more or less left with the ongoing CapEx?

I would say the last piece of the remediation project, though, is Granite City, and Granite City I think the capital at Haverhill will largely be spent this year, a little bit into next year but Granite City actually we take that on that's about one-third of the total project, and that will be spent in 2015,and a little bit in 2016, but you would have two-thirds of the project roughly done by the end of this year spending-wise.

Alright. Great. That's all of my questions. I appreciate it.

Thank you.

Thank you. Our next question comes from Nathan Littlewood from Credit Suisse. Please go ahead.

Good morning. Thanks, guys. I just wanted to talk about the increase in CapEx in Indiana Harbor a little bit. I was wondering if you could help us understand some of the offsets to that, perhaps some of the offsets are an increased EBITDA margin that you can earn longer-term, or maybe you can quantify the reduction in maintenance costs and the benefit of the higher charge rates that you talked about? Just basically trying to understand is this incremental CapEx is that a 100% hit on your chin, are what are the sort of incremental cash flow benefits we should think about?

Yes. Let's think about this post-2014 because it's really executing the project in 2014. Historically if we would have problems or holes in the oven floors and/or repairs with needed to make you would do it with silica welding which is maintenance expense. That process is effective when you have small, relatively small changes. It is pretty expensive and very, very intrusive if you have to do it on a more extensive basis. So the alternative approach, as we have said, we have spent about $15 million of capital. What does that do? It shortens the time associated with repairing the oven very significantly, number one.

Number two, we think we can get at least one more ton of charge weight going forward, which in and of itself is a reasonably attractive return, relative to just silica welding the existing floor and you wouldn't get the additional one ton, and then ongoing maintenance expense going forward, when you silica weld, you're generally silica welding about six months to three years later, because it doesn't, it's not a permanent fix. It's just ongoing maintenance. This would be a more permanent as you can see from the picture, this would be a more permanent approach.

So we do think this is actually number one a better way to do it relative to silica welding, and number two, we think it actually generates a return on investment. We are not prepared today to say anything other than theadditional one ton of charge weight, actually there as return for that. And it's just a much better approach, which we frankly came up with as we looked at the situation in the first quarter, and looked at, we took an inventory, it is about a quarter of the ovens in the plant where we felt like we needed to do this, and frankly our team has been working out there came up with this approach that was a much better more intelligent way to do it that we think will generate a return for us longer-term.

So there's nothing in the contract that allows for an incremental return on that capital through higher margins as such?

No. You have got to get the return from more tons, which we can sell more tons and ArcelorMittal will take the tons if we produce them, and the contract does provide for us to do that, and then lower maintenance costs which benefits frankly us as well as the customer longer-term.

Got it. Okay. I certainly appreciate all of the color, but I guess from our perspective I think anyone on this call is actually able to quantify what an extra 1 million ton charge rate actually means in terms of marginal cash settlement, so it would be helpful if we could get a little bit of guidance on that at some point in the future?

Okay.

The next question I had was just on the distributable cash flows. Back at the Strategy Day you indicated that the drop-downs would increase distributable cash flow by about $38 million on a pre-financing basis. The number you have given today is $23 million. Is the difference between the two purely the financing costs?

Yes.

In other words, is the underlying number apples-to-apples?

Yes. The difference is financing cost.

Okay. Third and final question was just on your guidance on tonnage. The change from 4.3 millionto 4.2 million tons is really pretty modest, I guess, in terms of what we're seeing in the steel industry at the moment, with all of the sort of iron ore, raw materials issues that they're having. Could you talk a little bit about the underlying blast furnace utilization numbers that are embedded into your full year production guidance?

So interestingly, obviously the blast furnaces have been affected by iron ore shortages, Lake Superior logistics, I have learned all sort of things about ice breaking barges, and let's face it. The winter has affected our customers in a pretty significant way. Interestingly, relative to the demand for our Coke there's been no desire in the part of our customers for us to dial back production. On the contrary, frankly, we wish we could have produced more, particularly from Indiana Harbor, so relative, I can't really comment on overall blast furnace utilization as we go into 2014. My crystal ball is not that good. If you look at order books, and we do talk to our customers. Their orders books are strong. They would prefer to be running more, and I think as they get through the disruptions of the winter, and get more iron ore deliveries more normalized, they want to run their blast furnaces at higher utilization rates, and they're going to be pulling on our coat, so we don't really think, as we look out for the rest of the year we don't see demand constraints hitting us.

Got it. Okay. On Mittal, Indiana Harbor specifically, do you know much about their inventory position in terms of iron ore at the moment?

No. I don't. You would have to ask ArcelorMittal that one.

Okay. No problems. Thank you very much. Appreciate it.

You're welcome.

Thank you. Our next question comes from Erin Scully from Indaba Capital. Please go ahead.

Hey, guys. It's actually Tom Mc Connon from Indaba.

Morning, Tom.

Quick question, guys. With the drop-down that should obviously increase the GP cash flows pretty significantly. Can you give us some kind of sense of pro forma what the GP cash flows should be once you have completed this drop-down?

Yes. Based on where we are in the splits, we have identified $23 million, and probably close to $4 million of that relates to GP cash flows.

So that's $4 million incremental from the drop-down?

Correct.

Great. Okay. Thanks, Mark.

Thank you. Our next question comes from Brett Levy from Jefferies. Please go ahead.

Hey guys. I guess with respect to the selling of the met coal assets, I guess it would reflect a certain amount of bearishness longer-term I mean you listen to some of these guys saying, listen 2014 is not going to be a great year, but maybe 2015 will be much better. I guess the question is, why not wait if you're at least medium bullish on met coal?

First of all, I don't have a view on met coal. I'm not that good. And even Mike Hardesty that works for me, who is that good, I mean his crystal ball is not that great either, and so our view is, no time like the present might as well just get on with it. We don't really have a strategy which could make us successful. We are sub-scale. We have all of the challenges in other words, it's not like we were printing cash when met-coal prices were high. So as we think about it now that the tax sharing agreement is over, yes, it's a tough time to sell the business. It's even a more difficult time for us to be in the business, and so we felt like it would be the right time to just get moving, and to the extent that if we have a few on met-coal, it's part of a transaction some form of the consideration is an upside from met-coal. Fine I'm flexible on that, I just don't think staying in a business where you don't have a recipe for success, and to wait for commodity prices to rise is a good strategy for us.

Got it. Then in terms of buying the balance of the JVs, is there a financing plan for that, or did I not understand that fully?

Could you clarify the question a bit?

Was it 325 transaction?

The drop-down, oh, I'm sorry. You're talking about, the drop-down transaction $365 million is 33%. Are you talking about the remaining 2%?

No, no, no. The whole thing?

Got it. We're not going to comment actually on that. What we said was, at Analyst Day that our drop-down plan in its entirety, including all of the Coke related assets, we would be able to support an 8% to 10% minimum growth in distributions over the three year period ended 2016, and we certainly see this transaction as being highly consistent with that.

Okay. Thanks much.

You're welcome.

Thank you. (Operator Instructions). Our next question comes from Sam Dubinsky from Wells Fargo. Please go ahead.

Congratulations on the first drop-down. Just some follow-up questions. Is 8 times now a good barometer about how we should think about future drop-downs? Just because I believe the initial plants that you were dropping down were some of your better plants, so potentially you may have been able to sell at a slightly higher multiple. I'm just trying to think about, how should I think about future EBITDA multiples when you look at it? And then I have a follow-up.

Let's start with the 8.3, which is the multiple here. Let's hold market conditions constant. Obviously market conditions whether it's interest rates, let's just hold market conditions constant for purposes of addressing your question.

Yes.

These are our best assets, but one of the important, a very important consideration for the multiple is the ratio of distributable cash flow to EBITDA, because we're expressing this 8.3 relative to EBITDA. Embedded in that is both the quality of the asset, at amount of replacement capital, the amount of ongoing capital, but also what is interesting, is the financing that comes with the individual transactions. So as I think about 8.3, these are some of our newest assets, some of our better assets. When we were to consider either a Jewell or an Indiana Harbor, we're going to have higher replacement capital accruals, we could very well have higher ongoing higher capital accrual, and so the ratio of distributable cash flow to EBITDA could be lower, so therefore the multiple would be lower.

I guess the last point I would make about this is that as part of the transaction, obviously, as the GP we are taking back roughly half of the units. So we maintain even as part of this drop-down transaction, we're getting about half the equity issued back to us as LP units, and obviously as the GP were moving up the splits, in getting the GP cash flow, so we benefit both directly and indirectly from the drop-down.

Okay. Great. And then just on your revolver. I know you are paying down the revolver. Technically I don't think you have to, but I know you're doing it. In theory does this mean that you now have more gunpowder to make logistics acquisitions with the revolver paid down, a little extra cash at the MLP balance sheet?

Yes. Sam, it is Mark. We thought it was since we are accessing the capital markets, and this was a draw that was really to buy a long-term asset, and it made sense to term it out, and so with the refreshing of the revolver we really are then able to do acquisitions and candidly fund some of the remainder of the environmental remediation, but your question is right on. We want to be able to do acquisitions without financing contingencies, we're accessing the capital markets. It made sense to just add this on when we went to market.

Okay. Great. And then in terms of your capital allocation strategy at the parent SXC, at what point do you think it makes sense for SXC to start paying dividends? What are you looking for, do you need most of the assets to be dropped down, do you needs a decision on DRI, maybe just clarify at what point you think it makes sense to pay a dividend?

I will give you the same answer that I gave you at Analyst Day. What we wanted to do is get the first transaction done, which we're working on now obviously we expect to those in May. That's a dialogue for the Board, and I anticipate the Board, the dialogue will take place in 2014. You have to wait for all of the drop-downs to be done. I think the dialogue should be taking place in 2014, and anticipate we have that with the Board, and be able to factor in all considerations including the MLP, including cash flows, including our capital plan, in order to arrive at a rational capital allocation strategy for the parent. So that's work in front of us.

Okay and then my last question is just housekeeping, I know you're pushing some a corporate overhead from the parent to the MLP. Once you do all your drop-downs, how much corporate overhead is leaving the parent and going to the MLP do you think? You can provide that.

It may be a little bit too early to comment on that. I think what we would like to do is as we think of a parent without the operating assets, we want to get to something that's more nominal than what we retain today. Obviously, today the retained corporate overhead is approximately $35 million. We're taking steps as Fritz mentioned to reduce that in view of selling the coal business, and then further we have done a pretty in-depth assessment as to where we're spending our time vis-a-vis the operations and the GP, and really what we're trying to do is do a fair rational allocation of costs and reduction of costs, so that when we get to a parent that has no operating assets, and you look at the retained corporate overhead it makes sense.

I'm sorry.

Lastly, the right time to do is when we consider drop-down transactions, because then the MLP, the conflicts committee as they approve a transaction those costs are included in the valuation. So it's absolutely the right way to handle it, and the right time to do it.

Okay. I apologize if I missed this, but what is the corporate overhead associated with the coal business?

Interestingly, you didn't miss it, if you look at our total corporate costs before allocations we're generally $80 million to $85 million, and then we allocate roughly $50 million of that to whether it's coke plants or the coal business. The coal business is a reasonable part, we spend a fair amount of time on the coal business. However, if you were to come to our headquarters, and try to pick the 25 people that work on coal everybody works on it a part of their time. We have some people, so the decision we took in order to reduce our manpower about 10% and curtail a number of other spending related categories was really intended to meaningfully reduce that gross number, so that if we were to sell the coal business, and no longer have the allocation that we wouldn't end up having a negative effect on our coke assets. We have not really talked about how much goes to coal versus other plants, so you didn't miss it, but that gives you some sense of what we're trying to get accomplished.

Great. Thank you very much. And congratulations again.

Thank you.

Thank you. We have no further questions at this time.

Alright. Well, again, thanks very much for your interest in SunCoke, and we look forward to talking to you next quarter. Thank you.

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