SunCoke Energy Inc (SXC) 2014 Q3 法說會逐字稿

Welcome to the SunCoke Energy third-quarter earnings call. My name is Vanessa, and I will be your operator for today's call. (Operator Instructions). Please note that this conference is being recorded.

I will now turn the call over to Lisa Ciota. You may begin.

Thank you, Vanessa, and good morning everyone. Thank you for joining us on the SunCoke Energy third-quarter 2014 earnings conference call. With me are Fritz Henderson, our Chairman and Chief Executive Officer, and Fay West, our new 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, and there will be a replay of this webcast available there. If we don't get to your question today, please feel free to call the investor relations department at 630-824-1907.

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

Great, thank you, Lisa. Good morning everyone. Prior to starting my comments, we did have a transition earlier this week within the management team at SunCoke. Mark Newman, our CFO, announced that he was joining DuPont to be the CFO of their performance chemical business. I called it spinco when it was first reviewed with me, but Mark will be moving on.

Mark was with us at the IPO and going forward. I want to thank him for his many contributions to SunCoke Energy and SunCoke Energy Partners, and wish him the best in his new role.

At the same time it was a great opportunity for us to recognize our bench strength within SunCoke and promote Fay to CFO. I hired Fay slightly before Mark, actually, and she has been with us, very experienced with the Company, just delighted to have her in this new position. So, good move for Mark, good move for Fay and really happy that we can do this. Wish Mark the best.

Move to page 2, the highlights for the third quarter. First, in terms of operations, it was a solid coke performance across the fleet. Our domestic coke adjusted EBITDA per ton at $67 was the best we have had since the IPO of SunCoke.

Indiana Harbor operated within its targeted production range and was a significant driver of the improvement in that regard. We did benefit in the quarter from a full quarter of coal logistics versus the third quarter of 2013, where we only had a partial quarter for Lake, and no volume and no profitability for KRT, inasmuch as we closed that transaction early October of last year.

We maintained strong safety and environmental performance in the quarter across the coke fleet. In terms of mining, we continue to negotiate with prospective buyers of this business. We do anticipate a transaction by year-end. It's not a certainty, but we continue to be constructive about the interest in this asset, the seriousness of the bidders.

We did, as a result of the Board approving the sale in the third quarter, reflect the coal mining as a discontinued operation. Fay will take you through what that means for our results.

In the quarter we recorded an additional $16 million pretax impairment charge related to the expected sale of the business, which reflects both expected selling costs associated with this business as well as an adjustment to some of the impairments and carrying value -- relative to carrying values after the second quarter charges we took.

Lastly, we would expect as part of the transaction about $10 million to $15 million of exit costs, which would be largely severance, consent fees and some termination costs that would come as a result of the divestiture. We would expect those costs to be incurred in the fourth quarter of this year.

Finally, in terms of capital allocation, we did initiate our first quarterly dividend that was announced earlier this morning at $0.0585 per share of SunCoke. I will talk more about that later in the presentation, but that was set at about roughly 33% of the GPLP cash flows that SunCoke earns from SunCoke Energy Partners. So, we were very pleased to be able to initiate a dividend, our first in our history.

Then we did complete recently the ASR program. You recall in the second quarter we announced $150 million share repurchase program which was done in the third quarter. We announced that $75 million of that would be done on an accelerated basis, and that was completed in October.

At this point I am going to turn it over to Fay.

Thank you, Fritz. I'd like to walk through some basis of presentation items on slide 3. In the third quarter we classified our coal business as discontinued operations, and have restated the prior periods to conform to this presentation.

Essentially the results of our coal business have been collapsed into a single line item on each of the financial statements. Also of note is that based on the discontinued ops treatment, fixed assets are no longer depreciated and corporate costs once allocated to coal operations are no longer allocated.

This allocation is roughly $8 million on an annual basis. The transaction is not finalized, but we have made certain assumptions.

Specifically, certain assets and liabilities previously included in the coal segment that are not anticipated to be part of the potential sale have been reclassified into the corporate and other segment. These assets and liabilities consist primarily of the coal prep plant assets, Black Lung, pension, OPEB and workers' comp liabilities, which totaled approximately $57 million on a net basis at the end of the quarter.

Given the nature of these assets and liabilities, we do not believe that they are directly related to our continuing operations and have now identified them as legacy costs. For the third quarter 2014 these legacy costs were approximately $1 million, and on a year-to-date basis are approximately $3.8 million.

In order to provide a more clear and transparent picture of our ongoing operations, we have revised our definitions of the non-GAAP measure adjusted EBITDA. We have defined adjusted EBITDA from continuing operations to exclude the impact of legacy cost, discontinued operations, impairment charges and exit costs. Chart 18 in the appendix to this presentation includes detailed reconciliations of these items.

Turning to the next chart, adjusted EBITDA from continuing operations for the quarter was $68 million, an improvement from the prior year quarter. This increase was based on strong domestic coke performance, primarily from improvements at Indiana Harbor.

Additionally, the third quarter benefited from the inclusion of a full quarter results for our coal logistics operations. You will recall that we acquired Lake Terminals in August 2013 and KRT in October of 2013, so comparisons between periods was impacted by the timing of these acquisitions.

Corporate costs were also lower compared to the prior year, which included M&A costs of roughly $2.4 million related to the coal logistics acquisition.

EPS from continuing operations was $0.21 in the third quarter, an increase of $0.07 from the prior year. EPS benefited from strong adjusted EBITDA, but was also impacted by higher noncontrolling interest and higher taxes.

Given our current presentation of continuing and discontinued ops, I would like to explain the loss in the second quarter of 2014. As I mentioned previously, certain assets and liabilities that will not be part of the potential coal sale have been reclassified into the corporate and other segment. Although we have identified these legacy costs for purposes of adjusted EBITDA and have excluded them from that calculation, we cannot exclude them from the GAAP measure of earnings per share.

As a result, the impairment loss taken on the coal prep plant in the second quarter is included in EPS from continuing operations, as we have referenced in the footnote on this slide.

Finally, in terms of guidance, we are reaffirming our 2014 outlook for adjusted EBITDA from continuing operations of $235 million to $255 million. Our full-year guidance for consolidated adjusted EBITDA, which is an all-in number and includes continuing operations, discontinued operations and legacy cost, remains in the $220 million to $240 million range.

But, we have recently seen some adverse trends in claim approval rates and discount rates related to our Black Lung liability. We believe that we could see potential charges of approximately $8 million in the fourth quarter, which is when we receive our final actuarial reports for this liability. These adverse trends were not contemplated when we set out our full-year consolidated adjusted EBITDA guidance, and could result in consolidated adjusted EBITDA at or below the low end of our current guidance.

Turning to the next chart on page 5, we had a strong quarter in terms of operating results. Adjusted EBITDA from continuing operations increased 33% over the prior year. Performance was driven by solid domestic coke results, the benefit of a full quarter of coal logistics, as well as lower corporate costs.

From a domestic coke perspective, both volume and yield at Indiana Harbor improved. Indiana Harbor also benefited from the favorable impacts of our new contract, which was effective October 1 of 2013. The rest of our domestic cokemaking business is up slightly year-over-year and I will take you through the bridge on the next chart.

Corporate costs are down versus the prior year, which included M&A costs associated with the acquisitions of our coal logistics businesses. Also contributing to the decrease are lower employee costs. You will recall that we took some restructuring actions earlier this year at our corporate headquarters, and we are now seeing this benefit in our current quarter results.

We estimate that the cost savings to be approximately $4 million annually.

EPS from continuing operations was $0.21, and I will take you through that bridge on a future chart.

Finally, discontinued operations reported a loss of $18.5 million or $0.26 per share. These results included an additional impairment charge on the coal business, and as Fritz discussed, we classified the coal business to discontinued operations and had to evaluate the carrying value of the assets to the fair value less cost to sell, which includes anticipated legal and banker fees. The third-quarter charge reflects these estimates.

Turning to the EBITDA bridge on chart 6, again, we reported adjusted EBITDA from continuing operations of $68 million versus $51.1 million in the prior year. Excluding our Indiana Harbor operations, the domestic coke operations were up slightly year-over-year.

We saw improvements in yield and volume at our Granite City operations, but volume and yield were down at our Haverhill operation. The volume shortfall was primarily related to the timing of coke shipment. We should see this sales activity placed in the fourth quarter.

While we're still above our benchmark yield at Haverhill, we are slightly below the prior yields -- the prior year. We have been working on addressing the lower yield and have seen recent improvements, so we are trending in the right direction the fourth quarter.

With respect to Indiana Harbor, results were $7 million better than the prior year. And as you could see on the chart, it related to higher volumes and better yield as well as the impact of the new contract.

International coke is favorable year-over-year with improved results in both Brazil and India. Favorable volumes contributed to the increase in Brazil, and year-over-year increases in India were driven primarily by unfavorable foreign currency impacts experienced in the prior-year period. Once again the quarter benefited from the contribution of a full quarter of coal logistics and reduced corporate costs.

Turning to the EPS bridge on chart 7, diluted EPS from continuing operations was $0.21, an increase of $0.07 from the prior year quarter. As you see, adjusted EBITDA is favorable, but is offset partly by a number of items.

Depreciation and amortization is up $0.05 versus the prior year, a portion of which is attributable to accelerated depreciation at Indiana Harbor, which was recognized in connection with certain refurbishment work on the oven. The balance of the increase is attributable to the inclusion of the coal logistics operations.

Noncontrolling interest increased due to the impact of the second quarter drop-down of assets into SXCP. Lastly, tax expense was higher this period based on higher earnings. Also, our effective tax rate was higher due in part to the absence of certain tax credits which expired in 2013.

The impact of legacy and financing costs was about $0.01 on a year-over-year comparison.

Turning to chart 8, our coke production for the quarter was 1.090 million tons and is up 9000 tons versus the prior year. Our adjusted EBITDA per ton was $67 in the quarter. This is the highest adjusted EBITDA per ton since our IPO. We expect our full-year adjusted EBITDA per ton to be in the range of $60 to $65, which reflects the impact that adverse weather had on our first-quarter production.

Turning to the next chart, on Indiana Harbor performance we continue to see an improvement in production and yield as well as operating results. Our third-quarter production of 275,000 tons was in line with the guidance we provided last quarter. Additionally, we are running above the benchmark yield.

We are slightly lowering our fourth-quarter production guidance by 10,000 tons to a range of 285,000 to 295,000 tons. From a full year adjusted EBITDA perspective, we expect to be at the low end of our previously disclosed range of $20 million to $25 million.

Further, we expect that adjusted EBITDA for Indiana Harbor will be up $15 million to $20 million in 2015. We expect production volumes to increase to capacity of 1.22 million tons.

Based on the terms in our new contracts, the recovery mechanism for operating and maintenance costs is changing from essentially a pass-through mechanism subject to certain limitations in 2014 to a fixed-rate recovery mechanism in 2015. Although we expect that we will see a significant decrease in the absolute spend on operating and maintenance costs in 2015, based on our new contract provisions we anticipate being in an unfavorable O&M recovery position in 2015. This under-recovery is built into the expected 2015 adjusted EBITDA range.

Turning to the next chart, adjusted EBITDA from discontinued operations was a loss of $3.2 million compared to a loss of $0.1 million in the prior year. Once again, this amount includes the coal operation, but excludes asset impairments, exit costs and legacy costs.

From an operations perspective we continue to experience price headwinds, and coal sales prices on a per ton basis have decreased by approximately $18 from the prior year quarter.

The chart on the right of the page begins with our previous coal guidance and adjusts for the presentation changes related to discontinued operations and legacy costs. What this shows is that we are essentially in line with our previous guidance and are just tightening the range. We expect to have a loss between $10 million and $13 million. Please note that this range does not include any impairment or exit costs.

Turning to liquidity on chart 11, we ended the quarter with a combined revolver capacity of close to $400 million and approximately $115 million in cash, which decreased from the second quarter balance of $204 million. While we did report positive cash flow from operations, we initiated the $75 million accelerated share repurchase program in the third quarter, which, when coupled with CapEx and distributions to SXC shareholders, reduced our overall cash balance. The accelerated share repurchase program was completed after the quarter end, and in October we took delivery of 3.2 million shares at an average share price of $23.27.

CapEx for the quarter was $26.4 million, the majority of which was related to the environmental remediation project. We have reduced our full-year CapEx guidance from $138 million to $128 million, primarily due to the reduced spending in our coal operations.

Additionally, we received approximately $1.8 million in proceeds from SXCP's ATM program, which we announced earlier this quarter. We issued approximately 63,000 units through the $75 million program. The ATM is a low-cost tool to raise equity, and given our plans for future drop-downs as SXCP, we view this as another tool to finance growth and expect to use this program opportunistically.

With that I will turn it over to Fritz.

Thanks, Fay. On page 12 we do summarize our capital allocation framework. As we look at SXC now, SXC's remaining leverage is modest. We have $240 million of bonds remaining at SXC after we completed the first drop-down transaction earlier this year. And we think, with the capital structure and expected future drop-down proceeds, we have the flexibility to the most importantly first pursue growth, and, secondly, to return cash to shareholders.

In terms of growth, except that we are spending capital at SXC, it would be most likely in the area of greenfield projects, whether it would be a new coke plant that we would build and then drop-down to the MLP, or if we were to do a DRI project it would be built at the parent and then drop down. So the parent is the logical builder of plants and recycler of capital, if you will, to grow the top line, to grow the EBITDA line of the enterprise.

M&A, to the extent M&A is done, and we are actively look at M&A opportunities, except that those opportunities are in businesses that generate qualifying income in their entirety, they would likely be done at the SXCP level, not at the SXC level. I wouldn't rule out M&A within SXC if you had a business that had a mixture -- a majority, if you will, of qualifying and nonqualifying income. But our focus in M&A is on qualifying income-related assets that could be done directly within SXCP.

We have the capital structure that we believe is -- has significant dry powder to allow us to grow the business. Secondly, we think that we are able to balance that with distributions to shareholders. We did initiate our first dividend announced this morning, a quarterly dividend of $0.0585, which is equivalent to 33% of our GPLP cash flows. And we think that's the logical thing for us to do as we think about moving to being a pure play GP over time.

That's a little bit over 1% dividend yield relative to the share price prior to the announcement. Then, finally, with respect to share repurchases we mentioned, as Fay reviewed, we did complete the first half of the share repurchase program when we took delivery in October of 3.2 million shares, and we preserve the flexibility to repurchase another $75 million going forward in the open market.

We really think that the capital structure of the Company and the structure of the two capital structures if you will -- SXCP and SXC -- provide the optimum structure for us to pursue growth while allocating capital to our shareholders.

Wrapping up the quarter, 2014 value creation scorecard, if you will, we think -- we continue to take action to unlock shareholder value and transition the Company to a more of a pure play GP.

Our business starts with operational excellence. We did and we continue to recover from the weather-challenged first quarter. We have seen improved sequential quarter and year-over-year performance improvement at our Indiana Harbor plant.

In terms of major projects, we have largely executed the oven repair programs included in the initial capital project at Indiana Harbor. We have some remaining work that we are doing in the fourth quarter and then in the next year, which a lot of that would be expense-related, hence the cost on recoveries we look at 2015 versus 2014 at Indiana Harbor. But that project is moving along well.

Then the gas sharing project at Haverhill 2 is ahead of schedule. We cut that project -- we cut the Haverhill 2 gas sharing initiative over in the third quarter.

We continue to test the capability of the system, but we feel like we're ahead of schedule in that project as we do planning and do work regarding Haverhill 1, and we prepare ourselves for implementation at Granite City. So the business begins and ends with operational excellence.

In terms of the structure of the business, we did execute our first drop-down in May. We expect to exit the coal business by year-end and we're working hard to get that accomplished. We continue to assess our timeline for future drop-downs.

I was asked earlier this morning in the SXCP call what our timing might be in that regard. What I said was we're doing the work to prepare and be ready to do future drop-downs. The next logical asset for us to consider would be our Granite City plant, and so we are doing carve-out financials. We are doing all the things we think are necessary to be prepared if the market is favorable to move forward on that.

I will spend a minute here talking about the other assets, because I didn't cover that this morning. If you think about the Jewell plant, it's logical to consider the Jewell plant post the coal divestiture as we have factored in whatever cost might be necessary to set up Jewell coal on a standalone basis, and untangle, if you will, Jewell coal from Jewell coke.

We are doing the work to have Jewell ready to go, but it would be logical for that to happen after Granite City. Then, finally, Indiana Harbor, what we would like to see is we would like to see two solid quarters of sustained operating performance post project implementation, I think, prior to considering Indiana Harbor. But we feel like, as I mentioned and as Fay reviewed earlier, we think our Indiana Harbor plant is moving along its timeline to become a full dues-paying member of the coke plant fraternity within SunCoke Energy.

Then, finally, in terms of allocating capital, we are pleased to be able to declare our first-quarterly dividend and complete half of our share repurchase program.

Thank you very much. At this point we will open it up for questions.

(Operator Instructions). Neil Mehta, Goldman Sachs.

Congratulations on the dividend announcement. First, as we look forward here, how should we think about the dividend versus the buyback in terms of your capital allocation strategy, and then specifically on the dividend, the path for growth?

Let me take each piece. First, I think of dividends differently from share repurchase. I think the share repurchase program was done, we felt like the SXC shares were an attractive opportunity when we announced the program. We still do. But I think of share repurchase programs differently from dividends.

I think dividends you initiate because you expect to sustain it, and consider growing it over time. It is really a return of cash to all your shareholders. As I think about growth in the SXC dividend over time, obviously, this is a function of the discretion of the Board of Directors. I think it is our objective over time to grow it, but I'm not going to speak for the Board. The Board needs to consider that.

But I think as you think about GPs, it's not coincidental that we set the dividend at a ratio relative to the GPLP cash flows. But I think in terms of the dividend of the C-Corp, in this case SXC, it's really important that we consider that the discretion of the SXC Board of Directors. We're just happy to begin the dividend and declare our first this quarter.

All right. Then in terms of M&A at the MLP level, this year has been a little slower than maybe we would have expected it to be. Do you want to comment in terms of the opportunity set and whether you still feel good about the M&A opportunity set at the MLP level, and how you think about potentially expanding the scope beyond maybe the current parameters?

Neil, thank you. I think you are being charitable, because we haven't closed a deal this year, so it is a little slower than we would have liked. But I would say it's not through interesting opportunities and lack of a focus and attention.

M&A is, by its nature, episodic. And you need to be disciplined in terms of your purchase model. We do continue to look at opportunities, organically first of all. We have fanned out with all potential customers and I want to talk about this in a moment.

But, on our next generation coke plant, we have it permitted. We have now initiate discussions with all of our potential customers. And for us, this would be a great project for us to kick off. It wouldn't generate EBITDA until later in 2017, but nonetheless this is our core business, so I think we're excited about that.

We are talking to potential partners in DRI and we think that would be very interesting project for us to do. We start out with organic growth as being a good opportunity, and we continue to look at that.

In terms of M&A, we look at coal logistics and we are looking at other verticals that we think logically connect to SunCoke. In other words, we're not going to go become an oil and gas company. But we do think that it's prudent for us to look at verticals away from just pure coke or even coal handling that have a logical connection to our processing capability, and would generate qualifying income.

We are, I think, as aggressive as we can be in looking at opportunities. We just haven't closed one this year. Again, we would like -- our preference is to do deals that would be done directly within SXCP for businesses that are generating cash flow and qualifying income immediately.

Let me come back to, Neil, the question of a greenfield plant, because I think the one point I'd like to make this morning is the backdrop for our customers and the backdrop for our business today is probably the best it's been since I have been at SunCoke. As I look at the demand factors for the blast furnace steelmakers that we serve, demand is -- whether it's seasonally adjusted annual rates in autos, the Architectural Building Index is trending positively, GDP in the US, I think in general the demand factors affecting steel production, and therefore in the blast furnace, are positive, probably the most constructive we have seen since, again, I have been with the Company.

Commodity tailwinds, while it represents a headwind if you are a commodity -- if you are a miner, and we have certainly seen that in our mining business, it represents tailwinds to our blast furnace steelmakers whether it's on the carbon side, coal and therefore coke, or on the ore side. Obviously, our customers have different levels of integration in ore, but ore price is falling. If you look at the competitors for the blast furnace, it is pretty positive.

The consolidation of the industry that we've seen, which has been quietly done, but it's pretty meaningful if we look at what's been accomplished in 2014. We think our customers, when you look at the equity markets and the debt markets and the -- their views of our customers -- U.S. Steel, ArcelorMittal and AK Steel, again, it's been as constructive as we have seen in recent history.

What does that mean for potential coke demand going forward? We were just excited about talking about our new project with our customers. And we -- it's interesting, when I saw the announcement on Essar Algoma and potential of recapitalization of Essar Algoma, I just think that the environment is reasonably good for us to be able to build a next-generation coke plant. From a return of capital perspective, and I will call strategic coherence, that is the most logical thing we could do to grow our EBITDA over the longer term.

Makes sense. Thank you, Fritz. Thank you, Fay.

Sam Dubinsky, Wells Fargo.

Just a follow-up, your EBITDA per ton of $67 is really strong, and yet not all of your coke plants are running optimally in the quarter. If we look out to 2015 what are the factors that would cause you to come in either above or below these levels going forward? Is there any planned maintenance, either are you guys are your steel customers? Why can't this number be sustainable?

Let me -- I'll tackle that one. We do expect as we go into next year that our number would be between $60 and $65. $67 is a really good number. Let's go through it piece by piece.

First, Indiana Harbor, we would expect Indiana Harbor's aggregate EBITDA to be up next year, but not -- as Fay talked about, we will have unfavorable cost recovery and we will have more volume next year. But I do think Indiana Harbor would be favorable.

If I think about the third quarter it is usually our best quarter, because the weather is usually the very best for us. And, so, we are generally seasonally going to have a reasonably good third quarter relative to your average across a year.

When I think about outages, we had one outage at Haverhill in the third quarter of this year. It was done well. Our outage in the second quarter of this year at Haverhill actually was more costly.

As we go into the fourth quarter we have an outage at Granite City, Middletown. Middletown has got some outages ahead of it. What I would say is I think the third quarter number was strong. We were happy with it. We have some opportunities for improvement, but we have some things with naturally would trend us down into the $60 to $65 range as we go into next year.

Lastly, we are evaluating the costs that we will incur at Jewell coke once we set it up on a standalone basis, independent of Jewell coal. And there will be some costs that affect Jewell coke as we go into next year. We haven't finalized that yet. This is something we would talk about as we set guidance for next year, you would expect us to talk -- and we do plan to talk more about that as we get into December and we review with you are guidance for next year.

But those are the factors that would tend to bring us closer to -- bring us into the $60 to $65 range. Notwithstanding that, we kind of liked our third-quarter performance of $67. It was a good, solid performance for us.

Okay, great. Then you talked to just recently, today and also in the earlier call about getting ready for drop-downs, but at the same time maybe waiting it out a little bit for the MLP to perform a little bit better. There was some good news today that you were able to drop down Brazil and that's a very high cash flow generator, no CapEx associated with it. And it's actually somewhat of a smaller transaction.

Why not pull that up and do that with all debt? Because I think you guys can do something pretty accretive there, which would also reduce the MLP and then make those drop-downs a little bit more likely.

Sam, we are continuing to evaluate our options. Obviously, that would be one of them. But I think that in the end, as I think about standalone financials, we kicked it off for Granite City. We would need to have Brazil. We've got Jewell. We have got a lot of work going on within the Company.

I would say stay tuned. It is interesting; it's about being ready, number one, and then discussing the market factors. And, you're right. We do have -- if you look at the leverage at SXCP, we are below our 3 to 3.5 debt to EBITDA level. So we do have modestly, I will call it, disproportionate leverage capacity to do a drop-down within SXCP, and we will be ready and we will be opportunistic.

Okay, great. Then just one last question on the coal business. You may not be able to give more color, but I'm glad you're sticking with your year-end target. Maybe you can just provide additional detail on the process.

Are there multiple bidders at this point, and are there firm offers? Or you are just evaluating which one is the best for the Company, or is it still a little bit early?

I would say, if you look at our chart, we did use the plural for a specific reason, because there are multiple bidders. I think it would be inappropriate for me to talk about individual bids.

We did refine our estimate, obviously, in the quarter based upon both expected selling cost but also a more refined view of what those bids might look like. But I think, Sam, it wouldn't be appropriate for me to speculate about the individual bidders.

But, as of now, you still feel pretty comfortable with the trajectory and all that?

I think our objective is to close the transaction before year-end, and equally we are doing work such that if a transaction is not feasible, that we are ready to rationalize the operation and reduce cash burn over time in a logical way. I've said consistently we think that selling the asset is the logical thing to do. There is legitimate interest in the business. We will develop our fallback plan such that if we not able to do a deal on reasonable terms, that we can rationalize the coal business relatively quickly.

Great, congrats on the really strong quarter. Thank you.

Lucas Pipes, Brean Capital.

Just a quick follow-up question on the coal side. In regards to keeping some of those legacy costs on the balance sheet, is that an indication of what you can monetize there? Or would you say there is still some negotiating room in terms of where those liabilities end up in the --?

I think as Fay said, the final transaction structure is not at this point known with great specificity, because there are multiple bidders. But it's our reasonable expectation that these liabilities are likely to stay with SXC.

In terms of pension, our pension plan is overfunded. So we're not -- and it's also frozen, and basically there is no new entrants. So we feel good about pension in terms of OPEB. We are capped. We are frozen. We know what that number is. We are not subject healthcare inflation risk. Again, we are not concerned about that.

Black Lung is the one thing that we have. It's interesting, if you look at our population of Black Lung, you have existing employees and IBNR associated with existing employees. Then you have retirees from Jewell, and we even have retirees from Kentucky mines that we never ran, but passed to us as part of the Sunoco spin.

It's not logical and it's not likely that we would, quote, monetize that by having a buyer assume those obligations. I wouldn't rule it out, but it's just not likely.

Then workers' comp, there is some similarity to Black Lung, although it's a different set of parameters. But it's likely that we would retain some reasonable portion of the workers' comp. That's the lowest of all those liabilities.

We just thought that it was more logical that we were going to keep some of these -- keep these obligations. And we ought to capture the cost in this legacy segment and be transparent about it going forward.

Great, that's helpful. Then when I look forward to 2015, obviously haven't provided guidance yet, but in terms of CapEx I would expect it to come down pretty meaningfully. Do you have an initial sense that you could share with us?

I would say let's hold that question until we talk about guidance. It would be -- I don't want to prejudge it. Obviously, in terms of gas sharing, Haverhill 1 is now -- we did do a lot of work this year -- excuse me, Haverhill 2. Haverhill 1 we have been spending on that project.

We would commence spending in Granite City sometime next year, but the timing of that is not finalized yet. So I would say hold the question until we talk about guidance for 2015.

Sounds good, thank you.

(Operator Instructions). Paul Luther, Bank of America.

Thanks for taking the call; a question on the Kentucky greenfield. Is there anything new or an update on that, or any new consideration on customer commitments and such before going forward?

I was a there is -- I wouldn't say it's new, but I think the environment, as I think about the status of our customers -- I was actually pleased. If Essar Algoma actually does exit their process in Canada, and they are talking about a $400 million equity recapitalization, that would be -- that would make Essar Algoma, in our judgment, a logical possible customer for us.

I just think that the environment is constructive. We have been in discussion with all possible customers, not that that's a huge population. We don't need a website for that, but we do talk to possible customers about it.

There is nothing different in terms of my view, that you need to have 60%, 70% of this plant committed before you kick off. Interestingly, I would say just stay tuned.

The environment is better today than it was even three months ago or six months ago for getting those sorts of commitments. But it's not you done yet, so -- and we're not really interested in putting shovels to the ground and commencing this project until we have got a reasonable portion of the plant committed.

Interestingly, as I think about it, if we get to that point where we have that kind of commitment, my view is that there is some reasonable chance of the rest of it could get committed while we're building the plant. But just say stay tuned.

Got it, thanks for that color. Then one of your big customers, obviously, made a fairly sizable blast furnace acquisition recently. Could that present another opportunity for growth for you down the road?

AK did close on the Severstal acquisition. They did acquire as part of that the Mountain State asset, which is a cokemaking facility. They have to decide their coke balance between what they want to produce at Mountain State versus what they want to source with us.

We're obviously -- we support AK from both our Middletown and are Haverhill site. We're in constant dialogue with AK about how we might optimize logistics, actually, within those three different coke plants, and in dialogue with MS to how we could support them over time.

I really don't think it would be right to speculate as to whether -- what it means for our Kentucky plant. I would just say they do acquire a coke plant as part of this, and they have to decide what they want to do with it.

Got it, great. Thanks, Fritz. That's all for me. Thank you.

We have no further questions at this time. I will now turn the call over to Fritz Henderson for closing remarks.

Thanks very much. Again, appreciate everybody's interest in SunCoke Energy and earlier the SunCoke Energy Partners call was good and constructive as well. Thanks for your investment in the Company and your interest in the Company, and we will look forward to speaking with you.

We will probably be speaking to you before the fourth quarter, because we will, I think, talk about our 2015 targets later this year. I think in December is the more likely target, and then we will be back to you with the fourth quarter earnings early next year. Thank you.

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