Welcome to the SunCoke Energy Third Quarter Earnings Call. My name is Vanessa, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. And 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’s 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. I’ll now 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 the 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 actually -- we hired Fay slightly before Mark actually. And she has been with us, very experience 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 two, 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’ve 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 ’13, where we only had a partial quarter for Lake and no volume and no profitability for KRT, as much as we closed that transaction in early October of last year. We maintained strong, safety and environmental performance in the quarter across the coke fleet. In terms of mining,…

Thank you, Fritz. I’d like to walk through some basis of presentation items on slide three. In the third quarter, we classified our coal business as discontinued operations and have restated the prior period to confirm to this presentation. Essentially, the results of our coal business have been flat into a single line item on each of the financial statement. Also of note is that, based on the discontinued ops treatment, fixed assets are no longer depreciated and corporate costs once allocated to corporations are no longer allocated. This allocation is roughly $8 million on an annual basis. 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 re-classified into the corporate and other segment. These assets liabilities consist primarily of the coal prep plant assets, black lung, pension, OPEB and worker's 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 costs, discontinued operations, impairment charges and exit costs. Chart 18 in the appendix to this presentation includes detailed reconciliation of these items. Turning to the next chart, adjusted EBITDA from continuing operations for the quarter was $68 million,…

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 dropdown transaction earlier this year. And we think with the capital structure and expected future dropdown proceeds, we have the flexibility to 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 will 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 topline, to grow the EBITDA line of the enterprise. M&A, to the extent M&A is done and we are actively looking at M&A opportunities, except that those opportunities are in businesses that generate qualifying income in their entirety. They would like to 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 mixer or maturity if you will of qualifying and non-qualifying income, but our focus in M&A is on qualifying income related assets that could be done directly within SXCP. So we have the capital structure that we believe has significant dry powders 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…

(Operator Instructions) And it looks like we have our first question from Neil Mehta with Goldman Sachs. Please go ahead.

Good morning, Fritz.

Good morning Neil.

Good morning, Fay.

Good morning.

So congratulations on the dividend announcement. So 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?

So let me take each piece. First, I think of dividend differently from share repurchase. I think, the share repurchase program we’ve done, we felt like the share, the SXC shares win attractive opportunity when we announce the program, we still do. But I think of share repurchase program differently from dividend. I think dividends you initiate because you expect to sustain it and consider growing it over time. So it’s really return cash to all your shareholders. As I think about growth in the SXC dividend over time, obviously, this is a function Neil of the discretion of the Board of Directors. I think, it's our objective over time to grow it but I’m not going to speak to 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 C-Corp, in this case SXC, it’s really important that we consider that the discretion of the SXC Board of Director. So we’re just happy to begin the dividend and declare our first this quarter.

All right. And then in terms of M&A at the MLP level, this year it has been lowest lower than maybe we would have expected it to be. 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’re being charitable because we haven’t closed the deal this year. So it’s a little slower than we would have liked. But I would say, it’s not through interesting opportunities and lack of it focus on 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. I want to talk about this in a moment. But on our next generation coke plant, we haven’t permitted. We’ve now initiated discussions with all of our potential customers. And for us this will be a great project for us to kickoff. 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’re talking to potential partners and DRI and we think that would be a very interesting project for us to do. So we set out with organic growth. Its 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 vertical 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 vertical away from just pure coke or even coal handling that have a logical connection to our processing capability and would generate qualifying income. So we are, I think, as aggressive as we can be in looking at opportunities. We just haven’t closed one this year. And again, I mean, our preference is to do deals that would be done directly within SXCP for businesses that are generating…

Make sense. Thank you, Fritz. Thank you, Fay.

You welcome.

Thank you. Our next question is from Sam Dubinsky with Wells Fargo. Please go ahead.

Great. Thanks guys.

Hey, Sam.

Hey. How are you? Good to chat again. 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? Are there any planned maintenance, either are you guys or 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 million and $65 million. $67 million is a really good number. So let’s go through it, kind of piece by piece. First, Indiana harbor, we would expect Indiana Harbor’s aggregate EBITDA to be up next year. As Fay talks about, we will have unfavorable cost recovery. We will have more volume next year so. 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 it generally, seasonally going to have a reasonably good third quarter relative to your average across the 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 in Granite City, Middletown has got some outages ahead of it. So 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 which naturally would trend us down into the $60 million to $65 million range as we go into next year. And 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 but this is something that we would talk about. As we set guidance for next year, you would expect us to talk and we will -- we would do plan to talk more about that as we get into December when we review with you our guidance for next year. So those are the factors that would tend to bring us closer to -- bring us into the $60 million to $65 million range. Notwithstanding that, we kind of liked our third quarter performance of $67. It was good solid performance for us.

Okay. Great. And then you talked to just recently today and also in the earlier call about sort of getting ready for dropdowns. 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 dropdowns 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 kind of kicked it off for Granite City. We would need to have Brazil. We’ve got Jewell. We’ve got a lot of work going on within the company. So, I would just stay tune, it’s interesting. It’s about being ready, number one and then assessing the market factors. And you are right. We do have -- if you look at the leverage of SXCP, we are below our 3 to 3.5 debt to EBITDA level. So we do have -- modestly, I’ll call it disproportionate leverage capacity to do a dropdown within SXCP and we’ll be ready and we’ll be opportunistic.

Okay. Great. And 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 maybe provide additional detail on the process. Like 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 costs 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?

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

Great. Congrats on the really strong quarter. Thank you.

Thank you.

And thank you. Our next question comes from Lucas Pipes with Brean Capital

Good morning, everybody. 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 --?

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 over funded. So we are not -- and it’s also frozen, and basically there is no new entrant. So we feel good about pension in terms of OPEB, we’re capped, we’re frozen. We know what that number is. We are not subject to healthcare inflation risk. And so again, we’re 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’ve existing employees and IBNR associated with existing employees. Than you have retirees from Jewell, and we even have retires from Kentucky mines that we never ran, but passed to us as part of the Sunoco spin. So it’s not logical and it’s not likely that we would monetize that by having a buyer assume those obligations. I wouldn’t rule it out, but it’s just not likely. And then worker’s comp, there is some similarity with the Black Lung, although it’s a different set of parameters. It’s likely that we would retain some reasonable portion of the worker’s comp, that’s the lowest of all those liabilities. So 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. And 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 kind of initial sense that you could share with us?

I would say let’s hold that question until we talk about guidance. I mean that would be -- I don’t want to pre-judge it obviously in terms of gas sharing. Haverhill 1 is now -- we did do a lot of work this year, Haverhill 2, Haverhill 2. Haverhill 1, we've been spending on that project. We would commence spending on 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 '15.

Sounds good. Thank you.

You’re welcome.

(Operator Instructions) And our next question comes from Paul Luther with Bank of America. Please proceed.

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 would say this, I mean, it’s -- I think I won’t say it’s new, but I think the environment as I think about the status of our customer, I was actually pleased. If Essar Algoma actually does exit their process in Canada and they talk about the $400 million equity recapitalization, that would be -- that would make Essar Algoma in our judgment a logical possible customer for us. So I just think that the environment is constructive. We've 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 -- there is nothing different in terms of my view that you need to have 60% to 70% of this plant committed before you kick off. Interestingly, I would say we 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 done yet. So we're not really interested in putting shovels to the ground and commencing this project until we’ve 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 I’d just say stay tuned.

Got it. Thanks for that color. And 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?

So AK did close on the Severstal acquisition. They did acquire as part of that the Mountain State asset which is a coke making 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. Obviously, we support AK from both our Middletown and our Haverhill site. We are 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 can support them overtime. I would -- 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 it does -- they do acquire 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.

Thanks, Paul.

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

Thanks very much. Again, we appreciate everybody’s interest in SunCoke Energy and earlier that 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 or probably 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 back to you with the fourth quarter earnings early next year. Thank you.

And thank you, ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may now disconnect.