SunCoke Energy Inc (SXC) 2015 Q2 法說會逐字稿

Welcome to the SXC earnings call. My name is Yolanda and I will be your operator for today's call. (Operator Instructions). Please note that this conference is being recorded. It is now my pleasure to turn the call over to Ms. Lisa Ciota. You may begin.

Thank you, Yolanda and good morning (technical difficulty) Relations section of our website at www.suncoke.com. And there will be a replay of this call available on the website.

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

Thanks, Lisa and good morning, everyone. Thanks again for joining us this morning. As you saw, we made a number of announcements, particularly related to SunCoke Energy Partners. In light of those announcements, we pulled forward our second-quarter results to today so that everyone has the benefit of seeing all the information at the same time.

Many of these announcements, particularly regarding the Convent transaction, we discussed in detail on our SXCP call this morning, but certain points bear repeating and we will do so here this morning. Importantly, all the actions we are taking are focused on driving shareholder value, so we will continue to guide us as we look ahead and we believe we are very much aligned with you, our investors, on this goal.

In terms of our announcements for the quarter, our operating results are in line with calendar year targets and I will have Fay take you through those numbers. As you saw last week, we doubled the quarterly dividend at SunCoke Energy. This morning, SunCoke Energy Partners announced the highly accretive acquisition of the Convent Marine Terminal. Fourth, we reached agreement with the conflicts committee to drop down the remaining 23% of our Granite City facility into SXCP and finally, we are affirming today our 2015 consolidated adjusted EBITDA guidance of between $190 million and $210 million.

Importantly, these actions I think reflect four points. First, it reflects the execution on the disciplined growth strategy that we laid out for investors toward the end of last year and we've been diligently working on. Second, a sensible approach that balances -- a sensible approach to capital allocation that balances maintaining the financial resources to grow our business with meaningfully returning cash to shareholders. Third, a commitment to do what we said we would do; and fourth and finally, the actions underscore and really highlight I think the stability of our long-term business model -- both the coke business that we are in today, as well as obviously with the announcement of Convent, our significantly larger coal handling business and this is done in the backdrop of what is clearly a challenging industry backdrop.

We will start by discussing some highlights for the quarter, walk through our capital allocation initiatives and then discuss the benefits of the Convent Marine Terminal acquisition before we open up for questions. I will turn over to Fay to talk about the quarter.

Thank you, Fritz. Starting with some highlights from the quarter, consolidated adjusted EBITDA, excluding one-time non-cash items, was down approximately $10 million. This decrease was driven by the underperformance of our Indiana Harbor facility and a pullforward of planned maintenance activities at Granite City. I'll cover these on the next slide.

We are pleased with the progress and execution of our coal mining rationalization plan and activities remain on schedule. As we've previously indicated, while we continue to seek a sale of our coal mining business, given the current environment, it is highly improbable that a sale will likely occur within the next 12 months. Accordingly, our coal segment reverts back to continuing operations. Importantly, this change has no impact on our consolidated guidance. Our coal operations, whether treated as discontinued operations or continuing operations, were baked into our original consolidated adjusted EBITDA guidance of $190 million to $210 million.

Turning to EPS, we reported a loss of $0.21 per share, which primarily reflects charges related to a one-time non-cash pension termination charge, which was about $0.17 per share. The termination of the pension plan and the related accounting charge were also considered in our 2015 guidance. As Fritz stated, we are reaffirming our 2015 consolidated adjusted EBITDA guidance and we expect to update that guidance following the close of our Convent Marine acquisition.

Turning to slide 4 and drilling further into first-quarter results, we identify the drivers of the year-over-year changes in adjusted EBITDA. Just a little help on reading this chart. Both the current period and the prior period results include non-cash one-time charges and these items are highlighted in blue on the chart. So to provide a more meaningful analysis of the current period operations, we will focus on results excluding these accounting charges.

Adjusted EBITDA in the second quarter of 2015 was about $46 million and was $10 million lower than the prior year. The two main drivers of this decrease are lower volumes and under-recovery of operating costs at Indiana Harbor and expenses associated with a maintenance outage at Granite City. As you may recall, we have regular maintenance outages at all of our plants. During an outage, we generally have higher maintenance expenses and lower production, which for Granite City was approximately $4 million in the second quarter. The dollar impact of this outage was in line with the expectations that were built into our full-year guidance.

So the best way to think about this is timing. Work was performed in the second quarter this year versus the fourth quarter last year. This year at Granite City, we decided to take our maintenance outage earlier than initially planned to align with our customer's outage.

Wrapping up this slide, our coal mining segment was down year-over-year reflecting lower coal prices and corporate costs were generally in line with the prior year.

Moving on to slide 5, adjusted EBITDA was $51 per ton for the quarter and was below the guided range. But we continue to have confidence in the performance of our domestic coke fleet as a whole. That is why we are reaffirming our full-year per ton adjusted EBITDA guidance of $55 to $60 per ton, albeit on the lower end of that range. The drivers in the second quarter were the Granite City outage, which I already discussed and the performance at Indiana Harbor.

On the Indiana Harbor front, our rampup continues and sequentially IHO has improved compared to the first quarter, but it continues to perform below targeted levels. I will ask Fritz to make some comments on the progress at Indiana Harbor.

Thanks, Fay. A couple comments on Indiana Harbor. First, if we look across our fleet again, the rest of our plants are performing in a very solid way. Our international operations, particularly Brazil, are performing very well. Coal actions are ahead of schedule. Corporate costs are under control. Indiana Harbor is our significant challenge, continues to be our significant challenge and frankly across our fleet, I would say the one significant challenge we have across our fleet.

As we think about it, it's certainly taken us longer than it's anticipated and it's cost us more, time being money. As we think about the status of the plant, we are commissioning the second major pusher charger machine now. That commenced about 30 days ago and we are in the process of doing that. The work that was done to learn from the commissioning of the first PCM has been good and we are doing a good job I think commissioning that second pusher charger machine. But it's obviously had some impact on our production here certainly in the last 30 to 45 days. But I would say results are good with respect to the second pusher charger machine, which is really the last major piece of equipment that's being installed in the facility.

With respect to the ovens and the oven performance, three of the four oven batteries are performing significantly better than they have in the past and the fourth is not and that's where we have the lion's share of our efforts focused today to resolve the remaining oven performance issues we have. It really goes to the heat in the ovens and the ability to put adequate charge weights and to run the plant in a stable way in that fourth battery.

You'll recall in the past that we've done significant oven repairs. We've done some floor replacements. Those have shown good results at other batteries and so the D battery, if you will, at Indiana Harbor is our last frontier. We have a significant amount of work underway today to bring that battery back to where it needs to be. So the plant can operate in a stable way going forward. Our objective is to finish that work before the winter begins and so that we exit 2015 running the plant in a stable way generating adequate operating performance. That's a quick summary of what's happening with Indiana Harbor.

Moving on to slide 6, we ended the quarter with approximately $202 million in cash and approximately $400 million in combined revolver capacity. This gives us significant flexibility to continue to execute on our growth opportunities and to return capital to shareholders.

Turning to cash flow, you can see we generated positive cash flow from operations of approximately $65 million and CapEx of approximately $14 million was in line with expectations. We also had approximately $5 million in dividend payments and $10 million in distributions to SXCP shareholders. Once again, we ended the quarter with a solid liquidity position, as well as a strong balance sheet. I'll turn it back to Fritz.

All right. Thanks, Fay. Let me talk about the Convent Marine Terminal. It's the premier -- we think a premier Gulf Coast coal export facility with a financially and operationally sound business model, one that is quite consistent actually with our coke business that will both materially expand our coal logistics platform and also diversify our customer base. It leverages our core competencies in coal logistics with new capabilities and represents our entry into the coal export market.

The facility itself has a number of strategic advantages. It's one of the most modern and lowest-cost facilities in the region. It's strategically located on the Mississippi River and is the only facility in the region with a direct rail link to highly valued, low cost Illinois basin coals. It's also dredged for Panamax capability, so it has unique logistics advantages. It has in place attractive, long-term, take-or-pay contracts with two leading Illinois basin coal producers who are generally thought of as the low-cost producers in that region.

The terminal itself is a tremendous asset with a stable base business and significant upside through a recent capital investment program that has just recently been completed with one remaining piece to go. It's about a $120 million total program, of which $100 million has been spent to improve efficiency for automation for unloading coal from rail and loading the ships. The last piece of the program, which is pre-funded as part of this acquisition, is $20 million to be spent on a new state-of-the-art ship loader, a second rail unloading system and additional storage infrastructure.

The combination of this CapEx, which is, as I said, the lion's share of it is already behind us with the last $20 million to go, will provide a significant platform for supporting these two customers going forward and provide growth opportunities beyond the 10 million tons of committed take-or-pay volumes.

With these improvements along with the direct rail link to the Canadian National Rail, we believe it's the most strategic terminal in the Gulf Coast region, a huge competitive advantage for the Illinois basin coal export market. And when it comes to creating value, the purchase price for the terminal represents $412 million, represents a 6.9 times EBITDA multiple with significant day one accretion that will support distribution growth for SXCP unitholders and importantly for SXC investors.

So turning to the next page, page 8 -- before I turn to page 8, a couple of points I would like to make about stress testing the business case. I made these points this morning at the SXCP call and I think they bear repeating here. When we looked at the coal terminal and specifically this acquisition opportunity, the first thing we focused on was the competitiveness of the Illinois basin coals, the cost position, the thermal properties, as well as the long-term demand dynamics both domestically and exports. Since the lion's share of the production from the Illinois basin is for the domestic market, an export market represents an important part.

But first things first, to understand the long-term competitiveness in the Illinois basin in there. The Illinois basin is the one basin in the US where we have seen growth. We expect it to continue to see growth. While it is high sulfur, it is high BTU and for most coal-fired power plants that have scrubbers installed, which is a significant portion of them, they are today burning Illinois basin coals. They are very low cost. They are very logistically advantaged.

We then looked at the importance of the export volumes to the overall profitability of these customers. Export volumes allow these customers, our two customers, to run their longwall operations efficiently and provide them the opportunity to, we think, optimize profitability across their total business, including domestic and export.

Third thing we looked at is the competitiveness of the site. Is this a competitive site from a cost perspective and logistics perspective and we felt quite good about that? Fourth, we looked at the credit of the two customers, both Foresight and Murray. We have seven-year take-or-pay agreements struck at the 10 million ton volume, which is being done at the -- which underpins the business case. When we look at both Foresight and Murray, they have -- they carry credit ratings frankly consistent with SXCP and one notch better than actually SXC. We look at their leverage. We look at their cost positions. These are two very low cost, very advantaged operators in an otherwise challenged industry, so we felt good about the credit.

We then looked at the business itself. This business, interestingly, looks a lot like a coke business even though it does different things, obviously. When you look at the amount of capital being put in place today, the $120 million program, once that's completed, this business involves modest levels of CapEx. It's not a business that requires a significant amount of CapEx. It's also not a significantly people-intensive business.

So if you look at the stability of EBITDA to cash flows, it's, we think, an ideal asset to be included in our MLP. The coverage relative to interest will be strong and so as we went through the individual pieces of diligence and stress testing, we came away feeling good about the acquisition. We came away feeling that the asset itself was advantaged. We came away feeling that our customers were advantaged.

And then finally relative to the overall transaction economics, we recover a significant portion of the purchase price in the initial seven-year term of the contract. So we feel like we appropriately balanced risks and rewards as we considered the transaction.

If you turn to page 9, the cash flow generation at the SXC level. This chart is intended to show you both the history of GP/IDRs, as well as the LP cash flows that we earn both for 2014 and 2015. Recall the MLP went public in 2013. You can see what's happened with GP/IDRs. In 2014, they more than doubled. This year, without Convent, we expect to be approximately $6 million. With Convent, it would be approximately $3 million assuming -- excuse me -- $9 million assuming a 9/1 close and then going forward, you can see what the impact of Convent is in terms of cash flows both at the GP/IDR level as well as the additional accretion at the LP. So approximately $16 million.

I made some comments earlier on the financing of the transaction for SXCP, which I think also bear repeating here. The way the transaction is being structured, Chris Cline himself and Foresight are taking back units. Those units were basically struck at a price which was approximately the last month of VWAP. I was asked on the call what that price was. It's approximately $17. So he is taking back units with appropriate lockup provisions over a 42-month period of time.

We are also assuming on competitive market terms pre-existing debt of about $120 million and then finally the remaining $214 million is being closed off the SXCP revolver/cash. And we would finance it permanently at the appropriate time. Today, as we look going forward, we would anticipate the lion's share at least to be done in the high-yield note market. If we were to do the entire amount of the financing with the high-yield note market, we would land within our targeted leverage ratio of SXCP of between 3.5 and 4.0. It would be approximately 3.8 to perhaps 3.9 depending on the rounding. We have the flexibility to do preferred under our shelf, but we'd have to see what the market conditions -- whether market conditions would warrant that.

We have no plans to issue any public units. Obviously, we are issuing units to Cline as part of the transaction. We have no plans to issue public units. The parent itself has the flexibility to make investment in the deal. It's not our intention to do that today, but we have flexibility to do so if we think that's the right way to optimize the financing. The parent will take back units as part of the Granite City drop, at least at the minimum and as we think about the financing of the Granite City drop, we would do that at the same time we arrange the permanent financing for the Convent Terminal. So you could see the parents being involved certainly at a minimum in the Bayou transaction -- excuse me -- in the Convent transaction. Going forward, as I said, we would anticipate the lion's share, if not all of the financing, to be raised in the high-yield markets.

So on page 10, a few comments on capital allocation. We remain committed to leveraging the MLP structure to create value for shareholders. We talked this morning about the LP accretion of between $0.17 and $0.22 at the MLP associated with the Convent Terminal. If we were to then distribute the remaining -- a significant portion of that back to SXC, which we would anticipate doing, that would support an additional $0.15 to $0.20 on an annualized basis in SXC dividends. So the transaction itself is highly accretive at the MLP and is significantly accretive to distributions and expected dividends and that will be management's intention to recommend once the transaction closes.

Earlier this morning, we announced an SXCP unit repurchase program. That would be done by SXCP using SXCP resources of approximately $50 million. That's about 20% of the public float of SXCP, so we've put that program in place this morning. And we also have at the parent level the remaining $55 million share repurchase authorization, which we would anticipate opportunistically executing against after today, after the announcements associated with earnings and the announcements today.

Finally, we would expect to call the remaining SXC bonds upon -- on or around the closing of the Granite City dropdown and after, you recall, for SXC shareholders, those bonds contain original indenture that have some fairly significant limitations associated with restricted payments. With the call of those bonds, we would revert to the restricted payment provisions that are included in our updated and amended credit agreements, most recently, which are more friendly from a GP standpoint toward restricted payments going forward.

So wrapping it up, before kind of talking -- before summarizing and taking questions, I did this morning and I will again today make a few comments on the proposed IRS regulations because we get lots of questions about this. Let me just repeat what we've said consistently, including on several calls. When we went public at the MLP, we went public with a will opinion from a highly capable law firm. That will opinion, like many other MLPs, allowed us to proceed and most MLPs go public with a will opinion. That will opinion today remains intact. We can run our business. We can acquire businesses. We can raise capital, we can do what's necessary to run our business even with the proposed regulations that are out there today.

Third, even if the proposed regulations as written are published, we believe we would continue to qualify with our MLP. And fourth and finally, if those proposed regulations are further edited to provide further restriction that for some reason would limit our ability to generate qualifying income from our base business, our coke making business, we certainly believe that we've operated responsibly and would avail ourselves of the 10-year grandfathering or runway provision, which comes into place 10 years after the publishing of the final regulations.

So we think we can run our business today. We feel quite confident we can run our business today notwithstanding the presence of these draft regulations. We've provided our comments that were intended to request clarification on certain provisions. But we are going to run our business today and we think we can do so.

So wrapping it up on page 11, we are executing against a long-term strategy that we've articulated earlier this year. For months, we've been discussing our long-term strategic objectives and our team has been working with urgency to execute on driving value for shareholders. Today's announcements are a product of that rigorous work, a reflection of our strong belief in our investment thesis and these actions position us to drive long-term value for SXC investors.

We have had over the last year probably seven significant looks at businesses and/or assets. Obviously, this is the first one we've announced. We have been disciplined. We intend to remain disciplined and when you remain disciplined, M&A can be episodic. We certainly feel like the broadening of the lens that we took on earlier this year to broaden beyond coal logistics and to look at industrial materials has allowed us to be more active. Our pipeline -- we continue to work the pipeline aggressively while at the same time -- and we've indicated this consistently -- we remain interested in coal, coal logistics and coal handling assets and obviously the Convent Terminal acquisition is an excellent example of the type of asset we think could be added to our MLP at both SunCoke Energy Partners and obviously at the SunCoke family over time.

We have a stable long-term business model that is proving itself against the industry backdrop and supports our ability to sustain and grow our cash flows. If you look at the coke business, we have long-term take-or-pay agreements. We do not take commodity price risk in our coke business. If you look at our coal logistics business, particularly at Convent, we have seven-year take-or-pay agreements. We do not take commodity price risk. We think we have the kind of business model which generates stable cash flows that we can grow over time as we grow the business, particularly through M&A in the future.

We are continuing to work on identifying and pursuing additional growth opportunities that leverage our core competencies and we are delivering on capital allocation priorities to grow our return of capital to shareholders. Our balance sheet, both pre and post the acquisition of Convent, is solid both at the MLP, as well as the parent. With the drop of the Granite City acquisition -- excuse me -- of the Granite City 23 -- the remaining 23%, we would call the remainder of the parent's bonds. The parent today has no net debt and certainly would have no net debt post the transaction and could very well have no debt at all, while the MLP would operate within our 3.5 times to 4.0 times debt to EBITDA targeted leverage range, which we think provides us the ability to continue to grow our business. So thanks very much for your time and now we will open it up for questions.

(Operator Instructions). Lucas Pipes.

I do have a follow-up question on the proposed acquisition. And that is could you break down the take-or-pay volume commitments by Foresight and Murray?

It's total 10 million and we are not going to break it down between the two.

Okay. Thank you.

Garrett Nelson.

Just a question regarding the drop in your domestic coke EBITDA per ton to about $51 during the quarter. I was a little surprised to see that, especially since your quarterly coke sales volumes were the highest in a long time. What was the driver of that and what gives you the confidence that number will rebound in the second half of the year to come within your $55 to $60 guidance?

So we pulled forward about $4 million of expenses for Granite City, which costs you about $4 a ton.

Okay. That makes sense. All right, thank you.

Lin Shen.

First question is you mentioned that the MLP does not need to issue equity publicly to finance their dropdown. Do you mean do not issue equity this year or maybe next couple years? I just want to clarify that.

Let me be really crystal clear. We do not have any plan to issue public equity associated with the Convent transaction, the Bayou transaction. We don't need to; we don't have to; we don't plan to issue public units. Whether or not we might issue public units in the future for other transactions, impossible to speculate.

Good. That's what I want to clarify. And also want to clarify, the lockup for Mr. Cline's shares, is it four to six months, you said?

42 months. The lockup is for 42 months. It's ratably over that time period.

Great. Thank you. The last one is can you also comment on what do you see, the current M&A market for coal or coal terminal (inaudible) because given their weak market, the coal market, I'm assuming that you should see a lot of opportunities? Just wondering like can you talk a little bit about what you are seeing there and what's the potential for SunCoke to build up more marketshare or more footprint?

So good question. We, in this case, feel like we've affiliated with two low-cost producers in the Illinois basin. We, for a lot of reasons, like the Convent Terminal in terms of -- it basically quadruples the size of our logistics business, so it's a really meaningful acquisition for us. We think that given what's going on in the coal space that you're going to see a significant amount of restructuring from parties that don't have the same credit quality that Murray and Foresight have. We could very well see other high quality assets coming available over the next 12 to 18 months and we will be vigilant in looking at it.

I think obviously you know as well as I all the announcements that have been made out there and we think actually that this could create some opportunities for us to further grow our coal logistics franchise on the right assets that support the right mines. So I think the opportunities are going to be there. I can't tell you which it's going to be, but we are going to remain vigilant and remain very involved because we think some opportunities (technical difficulty) maybe weren't there two years ago.

Great. Thank you very much.

Pavan Hoskote.

A question on the acquisition of Convent Marine Terminal. In your prepared remarks, you talked about stress testing the profitability of coal exports. Can you walk us through some of the ranges you used on key variables such as rail or barge costs from the mine to the port, freight costs, as well as international coal prices? And then more broadly based on the work you've done, can you comment on the profitability of Illinois basin coal exports relative to PRBN Appalachia coal?

So we did look at all of those factors, both the rail costs, which we know because we did our diligence and we know what the rail cost is. We looked at API 2. We stress tested API 2 at various ranges. We looked at what's happening with the seaborne freight markets and then we basically did netback work, FOB mine. We looked at the profitability both on a fully costed, as well as on a marginal cost basis to understand what the profitability was of Illinois basin coals. Certainly not only absolute sense, but relative to the domestic market because the customers in the Illinois basin and particularly our two customers balanced -- the lion's share of their business is domestic, but they obviously -- the export business is also important for them.

And then finally relative to the Illinois basin and other basins, the Illinois basin is significantly more competitive than other basins and significantly more profitable. Central, Northern and Southern App, we know something about Central App and I would say the cost positions of those markets are more challenged. And relative to PRB, they are pretty significantly challenged in terms of logistics, so we think the Illinois basin combines both strong mine dynamics, as well as advantaged logistics.

Got it. And just to focus on -- to just dig in a little deeper, when you talk about rail costs and barge costs, can you give us some rough estimates in terms of the numbers that you used?

No because we know the exact numbers and there are issues -- they are confidential between our customers and the rails.

Got it. Understood. And then just bigger picture now that you have this acquisition out of the way, at the SXC level, what is going to be the focus areas for management over the next couple of years?

What I would say is let me talk about the focus of the management team over the next couple months. I would say obviously, as I mentioned before, Indiana Harbor is our single largest operating focus and that's where we have a significant amount of attention and resources being dedicated by the management team to bring that plan up to performing the way it should. I would say the work being done on the M&A pipeline, we've been very active and we're going to stay very active because it's the way for us to grow the business in the near term.

I would say we've articulated what our game plan is with respect to capital allocation here. So I would say where are we spending our most time, this would be the basics of our business, whether it's the environmental performance of our plants, the safety of our people, these are the bedrock of our business whether it's in coal logistics or the coke business and I would say that 90% of the people, 95% of the people at SunCoke, that's what they work on every day is production yield, safety, environmental performance.

I would say in terms of how to grow the business, obviously it's working the M&A pipeline and also finally integrating the acquisitions. We expect to close this acquisition by no later than 9/1. The conditions closing are fairly customary and we are looking forward to bringing this terminal in and making it part of the family and continuing to serve these customers.

Beyond 2015, I would say we are really focused more on 2015. I think growth and growth in our business has got to be driven by M&A, which means you've got to work the pipeline really hard every single day.

Got it. Thanks a lot.

(Operator Instructions). [Matthew Barent].

It's Matt Mark at Jet Fritz. Following on the growth question, given that at the P level you're at your leverage target, and given the cost of capital in the equity markets currently, can you walk me through how you would plan to finance incremental growth?

Well, if you look at it, all the actions today, as you know, are focused on correcting what is a dislocated yield today at the MLP. We believe that the MLP structure over time is the right structure for our business, but obviously where the yield has been we were trading about a 16% yield for a business with no commodity risk, long-term take-or-pay agreements. So there was a lot of reasons why we think that the yield of the MLP is frankly dislocated from business realities.

If we are successful in moving that yield, we think that the MLP itself can -- we acquire assets that generate cash flow, so if we can go back to more normal MLP operations and use high-yield financing, normal financing opportunities and then issuing units like most MLPs do, then that would be best. If not, we have a parent that has no debt when the Granite City transaction is done and the parent generates significant cash as well. That's not our preference. Our preference is to actually use the MLP to grow our business, but we do have a parent with significant capacity to grow as well in the event we were to find attractive growth opportunities.

When you thought about buying this business, did you evaluate the alternative of buying stock in the parent? Using the parent's balance sheet to grow, it's not a riskless or costless endeavor. There's a huge opportunity cost. Did you evaluate that?

Yes, that's why we did the transaction at SXCP, not at the parent. Obviously, we've done share repurchases at the parent. As I said in the charts, we are going to execute opportunistically against the remaining $55 million authorization, but we choose not to do this transaction at the parent today.

On a go forward basis when you looked at an acquisition, would you evaluate it against the cost of capital of the parent, what you could do with the capital at the parent?

Yes.

When does the seller financing expire?

Pardon me?

The seller financing piece of the deal, when does it expire? When do you need a permanent financing structure?

It's six-year financing, Matt.

So you have six years to come up with a permanent financing plan? You're not under any pressure to do a financing in advance of that?

No, not that. We have $214 million that's being closed off of cash and the revolver. That's the piece that we want to term out. But the actual seller financing is on market terms and we have no pressure to refinance that.

And so what's the timeline on that $214 million on the revolver? When would that need to be finalized by?

There's no -- we're fine at $214 million, so I think we are going to refinance that and term it out at the appropriate time. We don't have anything ticking that says we have to go by such and such date, which is the ideal position to find yourself in.

You've said several times this morning that you don't expect to do a public equity offering of P-shares. But you've raised -- you've said public three or four times -- you've raised the idea that the parent could buy P-shares as a way of financing the transaction. Why would that make sense as opposed to using you revolver in the six-year seller financing?

Actually, first of all, the six-year seller financing is already in place. So as I said in my comments, it's not our preference to do that. We have the flexibility -- certainly we will do that as part of the Granite City transaction at a minimum because you need to do that from a tax standpoint. Beyond that, actually my preference is not to provide any parent financing in the permanent structure for the Convent transaction.

One last question. When you guys say that your plan is to distribute 80% to 90% of the free cash flow at the parent to shareholders, is that -- are we going to accomplish that over a certain period of time? Is there a timeline around that? Are we sort of there now in your mind? If not, when would we get there?

I would say -- it's a good question. It actually gives me a chance to talk a bit about dropdowns a bit more. So what we said when we articulated the 80% to 90% is we thought that was a suitable payout ratio once you became -- once the Company, SunCoke, became a pure play GP and dropped the remaining part of its assets.

But let me stop there and say we obviously have Jewell sitting upstairs; we have Brazil sitting upstairs; we have Indiana Harbor obviously being refurbished sitting upstairs. Our belief is, over time, we are best served growing our MLP and leaving SXC as a pure play GP and distributing 80% to 90%. But I also made the comment earlier that our yield today is dislocated from market reality. We're not going to destroy value by dropping assets into the MLP willy-nilly without having a reasonable economic basis for it.

So if we are not able to do that, those assets are still sitting upstairs. They are generating cash flow. You've certainly seen our willingness to increase dividends at the parent. The Convent transaction itself provides $0.15 to $0.20 more of dividend capacity at the parent and we remain with Jewell, Brazil and Indiana Harbor sitting upstairs, which are -- which can support additional dividends at the parent. Obviously dividend policy is the function of the Board, but we don't see that we have to drop all the remaining assets down to pursue our capital allocation priorities.

Now your last question on timing, I think we are going to have to see what the reaction is here over the next 30 to 45 days in terms of what happens with the MLP. As I said before, we think that the MLP's yield today is irrational and dislocated from the economics of the business and then judge accordingly.

Okay. Thanks.

Paul Luther.

Thanks. Can you just provide I guess a bit of an update for Indiana Harbor, if you see a better second half than first half given the latest major piece of equipment installed and when you think you might get to the expected run rate on that?

Yes, it will be a better second half than first half, but that's not a great bar because the first half obviously included a pretty weak first quarter. We are behind our plan. We are actually on schedule with respect to the commissioning of the second major piece of equipment. And as I said before, we anticipate finishing the work on the remaining battery before we get into winter because it's really important that we do that so we are stable coming out of this year. That's really all I can say about Indiana Harbor at this point.

Okay, thanks. And then just an update on coal with the backing of consolidated ops, do you have more strings you can pull in terms of cutting costs or potential further rationalization there or do you expect that kind of steady state going forward for the time being?

We're ahead of schedule on our coal rationalization plan. If you just look at manpower, for example, our peak manpower at coal was a little over 500 people at the end of 2012. At the end of 2014, we had 400 folks. Today, we have 46. And we are on path to bring that down to the minimum necessary to oversee both the procurement activities, as well as whatever contract mining is being done at the site. So we do have some additional levers to pull in the second half of the year.

We articulated the ongoing drag of coal longer-term could be approximately $12 million to $12.5 million. That is still what we believe is the potential for drag going forward and really what that is is roughly the transportation cost of bringing purchased coals into the coke plant at Jewell. We will continue to look for opportunities and levers to lower that cost too, but we are on path to achieve at least that.

Okay. Got it. Thank you.

Okay. I'm advised there are no more questions. So again, thanks very much for joining us this morning and for your support and your investment in SunCoke Energy. Thanks, bye.

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