SunCoke Energy, Inc. (SXC) Q2 2014 Earnings Report, Transcript and Summary

Welcome to the SunCoke Energy, Inc. Investor Call. My name is Hilda, and I will be your operator for today. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Ms. Lisa Ciota. You may begin.

Thank you, Hilda. Good morning, everyone, and thank you for joining us on SunCoke Energy's Second Quarter 2014 Conference Call. With me are Fritz Henderson, our Chairman and Chief Executive Officer; and Mark Newman, our Senior Vice President and Chief Financial Officer. Following the remarks made by management, the call will be open for Q&A. This conference call is being webcast live on the Investor Relations section of our website at www.suncoke.com, and there will be a replay of this call available there. If we don't get to your questions during the call, please call our 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 our remarks today. These documents are available on our website and -- as are any reconciliations of non-GAAP measures discussed on this call. Now I'd like to turn the call over to Fritz. Thank you.

Thank you, Lisa, and good morning. Chart 2 is a quick review of the highlights of the second quarter. In terms of the operations, the coke operations recovered from what was a weather-challenged first quarter. We achieved adjusted EBITDA per ton of the coke operation at $61 a ton. It's a good number for us, and we felt good about that performance. Coal Logistics were also key contributors to results. We did -- we continue to maintain strong coke and coke safety performance within the operations. We -- in the second quarter, we began the journey, and we're transitioning SunCoke Energy, or SXC, to a pure play general partner of a master limited partnership. We did complete the first dropdown transaction to SunCoke Energy Partners, the first step of a plan to drop our coke business's entirety into the master limited partnership. Just for your information, for example, our cash flows from GP and LP interest in SXCP are expected to be $11.2 million in the third quarter. So this was a good step for us and an important step for us. The sale of our mining business, which is also an important step toward this transition, is progressing. We've received several indicative offers from quality bidders, and that process continues. We did, in the quarter, and Mark will touch on this, record $103 million of noncash impairment charges, $97 million of which was long -- were long-lived asset charges and $6 million of which was goodwill. And that was recorded in the second quarter, which obviously had a very large negative impact on EPS. We have also embarked on and are initiating our capital allocation strategy. This actually landed this month in the third quarter, but it was actually worked on in the second quarter. The board did approve in July a $150 million share repurchase program, $75 million of which would be executed on an accelerated basis. And we ended the quarter with a strong financial position, both in terms of cash, liquidity, leverage and leverage capacity to provide us with the flexibility to pursue growth and return cash to shareholders. In terms of the results on Page 3. The first set of numbers is adjusted EBITDA on -- what it shows is a solid Domestic Coke performance based on better Indiana Harbor results, and Mark will walk -- do the walk on adjusted EBITDA. We also, in the second quarter of 2014, benefited from the inclusion of Coal Logistics operations, which didn't exist in the second quarter of last year. And then finally, in the Coal segment, we did benefit from a favorable adjustment to contingent consideration, and Mark, again, will take you through the different pieces. But that did mitigate what would otherwise been wider adjusted EBITDA losses driven by lower pricing within our Coal segment. But at $60.5 million, we're up $8 million relative to the second quarter of last year and obviously up $27 million versus the first quarter. So we felt like it was a quarter of progress from an operating perspective. EPS was affected by the coal impairment charge. It was affected by cost, both interest cost, noncash cost associated with debt extinguishment and transaction cost associated with the dropdown transaction. And we also had favorable noncontrolling interest in the quarter. Excluding the impairment, we've done some work and reaffirmed our adjusted EBITDA outlook of $220 million to $240 million for 2014. We've also done some work to actually recast that for continuing operations with the decisions regarding coal. Coal will be reported going forward on a discontinued operation basis, and we'll go back and restate prior periods as appropriate for that. But what we needed to do is recast our guidance for continuing operations, and that number will be $235 million to $255 million. That number also includes about $8 million that historically, or this year certainly, would have -- were planned to be allocated to the Coal business. Once an operation is reported on a discontinued operation basis, the corporate allocations, which were normally borne by that business segment, now move back to the remaining continued operations. Interestingly, I reflect back, and I would point you to the actions we took in the first quarter, actually, to reduce our corporate costs. This was done in anticipation of this sort of thing happening. And the intention of those actions to reduce costs was to attenuate this impact as we go into 2015. At this point, I'll turn it over to Mark.

Thanks, Fritz. I'm on Chart 4 with another solid quarter in terms of operating results, returning to normal after a weak Q1. However, our results in the quarter are impacted by our continuing restructuring of the business and reflect the costs associated with the dropdown that Fritz mentioned, as well as a $103 million noncash impairment charge in our Coal Mining segment, which was triggered, given that it's more likely than not, we will sell those -- that business and the related assets. Excluding this impairment charge, adjusted EBITDA is up 15%. As you'll see in the chart, Domestic Coke is up approximately $2.6 million, in large part driven by the improved fees -- fixed fee at Indiana Harbor. The rest of our cokemaking business on average is relatively flat, but I'll take you through the bridge. Coal Mining is a net add to us. We did not have this segment last year. You'll recall we started in the Coal Logistics rather [ph] segment in Q2 -- or rather in Q3 of last year. And then finally, Coal Mining is up $1.4 million, but reflects a $4.3 million improvement in contingent consideration adjustment in the quarter. Again, I'll take you through that in detail. So net-net, adjusted EBITDA up $8.1 million, primarily driven by Coal Logistics and the higher fixed fee at Indiana Harbor. Corporate costs are up in the quarter, but again, reflect the impact of a $1.7 million increase in dropdown-related costs that occurred in the quarter. And then finally, EPS, a loss of $0.71 per share, again, reflecting the $17.4 million in dropdown costs at SXC, as well as a $103.1 million impairment charge. Moving to the EBITDA bridge on Chart 5. Again, we reported EBITDA of $60.5 million versus $52.4 million in the prior year. Our Domestic Coke performance is flat, essentially. We did trim our guidance at SXCP as a result of reflecting the higher outage costs at Haverhill. We had an outage in Q2, as well as yield running slightly below expectation for the full year. And that is offset by improved performance at other domestic coke assets. With respect to Indiana Harbor, we -- our quarter benefited from the higher fixed fee, which was negotiated in Q3 of last year, somewhat offset by higher O&M costs and slightly lower production as we ramped that asset up. International Coke is relatively flat, with improved results from Brazil and worse results from India. And then finally, Coal Logistics had a very strong quarter on the basis of both improved results at Lake as Indiana Harbor ramps up, as well as higher thermal and met coal volumes through our KRT facility. Coal Mining, as I mentioned earlier, is favorable, but includes a favorable $4.3 million adjustment. We did achieve our targeted cash cost in the quarter, but pricing headwinds continue. And then finally, corporate is up slightly, but is more than explained by the higher -- by the costs related to the dropdown. On the EPS bridge on Chart 6, we reported an EPS loss of $0.71 versus $0.08 earnings per share last year. As you'll see, adjusted EBITDA is favorable, but that's offset by a number of other items in the quarter. Indiana Harbor accelerated depreciation accounted for roughly $0.06 of the $0.07 in DD&A. For the full year, accelerated depreciation at Indiana Harbor is still expected to be approximately $20 million or about $0.29 per share. Additionally, we have the costs related to the tender premium of $11.4 million and about $4 million of debt extinguishment costs, which show up in interest expense. The impairment charge results in roughly a $0.74 loss on an EPS basis. And then finally, our noncontrolling interest is favorable, really related to the fact that our net income at SXCP is down year-over-year, again, related to about $19 million of transaction costs that flows through SXCP. Turning to Chart 7. This chart shows, as Fritz mentioned early on, the return to normal from a weak Q1. Our coke production year-over-year is down approximately 22,000 units and really reflects the lower production at Haverhill, again, due to the outage that we took in Q2, as well as the ramp-up at Indiana Harbor. And I'll talk more about Indiana Harbor in a moment. With the ramp-up of Indiana Harbor that we anticipate in the second half, we expected EBITDA per ton to move to -- on our Domestic Coke business to $60 to $65 per ton versus our prior guidance of $55 to $60 per ton. Turning to Chart 8. On Indiana Harbor performance, they continue -- the improvement really continues, both in production and for the first time in a very long time, we're running above the benchmark yield at that facility. We expect the ramp-up to continue in the second half, and we have a balanced approach here where we're focusing on gradually increasing charge weights while maintaining yield above the benchmark and then continuing to execute the repair work in a way that will keep our operating and maintenance costs under control. The blast furnace restart at ArcelorMittal, blast furnace #7, is underway. And in July, a portion of our production will be sold to ArcelorMittal on a deferred payment terms basis, and these payment terms will fully unwind by the end of the year. So we will have some distortion in working capital in Q3 and probably the early part of Q4, but that will fully unwind. And this is a preferable approach to us to provide payment terms so that we can continue the ramp-up at Indiana Harbor. Finally, in terms of our full year guidance, we are still anticipating EBITDA of $20 million to $25 million on our full year production of around 1,030,000 tons. In the first half, we're essentially at a breakeven, given the weak start we had in Q1 and the higher cost related to the refurbishment project at Indiana Harbor. In July, month-to-date, we continue to show further improvement over June in line with the ramp-up plan that's in Chart 8. Turning to Coal Mining on Chart 9. As I mentioned earlier, we did achieve our cash cost target for 2014 of $115 per ton in the quarter, but as you'll see in the chart, the price headwinds continue with our price realized in the quarter down $16 per ton versus the same period last year. As I mentioned earlier, our adjusted EBITDA in the quarter reflects the $4.3 million contingent consideration related to the Harold Keene purchase. The sale process, as Fritz mentioned, is underway, and as a result of that, we did trigger the $103 million impairment charge in the quarter. We are anticipating based on the quality of bids received that we will be able to complete this transaction by year end, and our operations will be treated as discontinued ops in Coal Mining starting in Q3. In terms of liquidity on Chart 10, we did report positive cash flow from operations of about $26.1 million in this quarter. You'll recall in Q1, we had weak cash flow from operations primarily because of some of the working capital unwind related to accrued liabilities that were paid in that quarter. I just want to remind everyone that while working capital or cash flow from operations is positive, it does include the impact in the quarter of the transaction cost related to the dropdown, namely, the $11.4 million tender premium cost, as well as the other transaction costs that are recorded at SXC. Our CapEx and investments in the quarter was approximately $40 million. Again, this is in line with our full year guidance and reflects roughly $18 million of ongoing CapEx, about $6 million at Indiana Harbor and then the rest related to our environmental remediation project. On the financing side, the net of all of the financing activities, including the SXC equity issuance due to auto financing, is a net add of approximately $40 million. And within that, you'll see that our debt came down by approximately $31 million. And the way I think about that is the MLP assumed debt from the parent, which it paid down in full in the transaction. And the net debt reduction is essentially $31 million related to the SXCP revolver, which was paid down. It was roughly $40 million drawn at the time of the transaction, and we did a draw on that of roughly $9 million. So a net of $31 million in the quarter. Finally, on auto financing activities, in addition to the distribution made to unitholders, we did purchase roughly 10.1 million shares -- of SXC shares for benefit purposes under the previous approval to buy shares for benefit purposes in the quarter. So we did roughly $10.1 million ahead of the newly announced share repurchase program of $150 million. We ended the quarter with $204 million in cash and with the upsize revolver at SXCP, significant revolver capacity at both SXCP and SXC. Turning to our balance sheet metrics on Chart 11. We thought it was useful to remind our investors that ahead of the stock repurchase program that we believe SXC is up leveraged. And what this chart shows is the SXC consolidated, again using the midpoint of our affirmed guidance range, is roughly $230 million, and that results in net debt on a consolidated basis of about 2x. When we look at -- when we break that out between the 2 entities, SXCP and SXC, what we're showing is that SXCP, again based on the guidance we provided today, is levered on a net debt of roughly 2.5x. And what we've said is, over time, we believe SXCP can be levered at 3 to 3.5x. So in our view, SXCP retains additional leverage capacity. Finally, with respect to the balance attributable to SXC, or sometimes we refer to as "remain coal", we have $169 million of EBITDA. Again, if you look at the EBITDA line, you'll see that the $169 million and the $145 million add up to $314 million. And the reason for that is that the SXC -- the EBITDA attributable to SXC includes the assets, the EBITDA from assets that remain at SXC, as well as the GP and LP cash flows from the EBITDA that arises at SXCP. And so net-net then, the 2 numbers add up to more than the consolidated EBITDA of $230 million. Again, when we look at the SXC leverage of a total debt of 1.4x, our view is that SXC is quite conservatively levered today given the cash flows that accrue to it from both the assets at SXC, as well as the GP and LP cash flows from SXCP. Okay, with that in mind, our board approved this month, in July, a $150 million share repurchase. And I'd say it's predicated, first, on the current leverage of the entities I just covered with you. It's also predicated on the fact that SXC has significant dry powder retained for future dropdowns. As you may recall, with one dropdown completed and with the Indiana Harbor refurbishment and Indiana Harbor back to normal, SXC will retain approximately $135 million of adjusted EBITDA, which it can drop down into the MLP. And depending on what EBITDA multiple you apply to this level of earnings, that represents somewhere in the zip code of $1 billion in potential proceeds, which obviously could be taken in both cash and noncash instruments. Additionally, with this EBITDA dropdown into the MLP, GP and LP cash flows would increase, which will provide further leverage capacity for the parent. So as we see it today, not only are we able to afford this stock repurchase and be able to fund both growth and return cash to shareholders, we thought it was prudent to embark on this program, given the significant gap, in our mind, between the intrinsic value of SXC shares based on our restructuring plan to move to a pure play GP and where the shares trade in the market today. The $150 million share repurchase program, as Fritz mentioned, will be executed half through an accelerated share repurchase or ASR program, which we expect to be completed by November, and the rest through the open market. And then finally, I'll just remind everyone that SXCP can fund acquisitions directly through its own access to debt and equity markets, and we remain very active in looking for acquisition opportunities directly into SXCP. Before I return -- before I turn the call back to Fritz, I just want to make a few comments on guidance. Throughout this call, we have reaffirmed our guidance, our 2014 EBITDA guidance of $220 million to $240 million or $235 million to $255 million on a continuing operations basis. We did earlier today on the SXCP call trim our SXCP guidance, again, reflecting the outage cost at Haverhill, as well as the lower yields -- our expectations being lowered for yields for the rest of the year. We also covered in this call our CapEx guidance, which will remain unchanged at $138 million for 2014. Given the corporate restructuring transactions, we do not plan to update our earnings per share tax rate and cash flow guidance for the rest of 2014, given the uncertainties, primarily around how any coal sale will be structured going forward. While we don't plan to update our cash flow from operations guidance, we do expect our cash flow to be somewhat lower than we previously guided to, given the transaction cost and the likelihood that our full year EBITDA guidance will likely be in the lower half of the range. Again, we don't plan to give you this, but I thought I'd share you -- share with you that our expectation is -- versus the guidance we provided in May on cash flow from operations, we would expect to be down somewhat from the $160 million we shared with you then. With that, I'd like to turn the call back to Fritz to wrap up.

Thanks, Mark. Just reflecting on the second quarter, it's in many ways continuing our transformation. We did execute the first dropdown in a plan to drop down our Domestic Coke business in its entirety into the MLP, which is intended over time to drive growth in GP and LP cash flows earned by the parent. The expected proceeds, as well as debt capacity within SXC, provides in our view the right flexibility and the right capacity to pursue both growth, to the extent that the parent needs to fund a capital project that might need to be subject to a gestation period or construction period over time, we can do that, and return capital to shareholders. So we executed the first dropdown, which was the 33% of Middletown and Haverhill. We have kicked off and are in the process -- the sale process associated with the coal business, and it really should look at -- the continuing operation shows you what we are driving toward in terms of 2015 being able to run the business with our coke business and with Coal Logistics and with the coal business divested into going into 2015. And finally, in terms of capital allocation, we began in this month with the announcement on the share repurchase program, our process of returning cash to shareholders. That program itself was approved $150 million, $75 million of which will be done on accelerated basis. With that, we will now open up for questions. Thank you very much.

[Operator Instructions] The first question comes from Neil Mehta from Goldman Sachs.

So maybe the first question is if you could give us some insights in terms of how you thought about capital allocation, how you weighed a buyback versus a dividend and whether you think a dividend still makes sense as one of the capital allocation [indiscernible].

So obviously, dividend policy as well as repurchases are the purview of the Board of Directors. What we thought about is as we looked at -- one of the things -- I think about things in progression and timing. What we said at our Analyst Meeting in March is that we kicked off and the Board of Directors approved a program to put our Domestic Coke business in its entirety into the MLP. From that, what I said was I think a logical step for the board in 2014 was to begin to consider capital allocation. We had reviews in May and then again in July on both showing the board what our capacity was, what does SunCoke look like as it transitions to a pure play GP? What capacity do we have to fund a new coke plant or a DRI plant? Do we have the capacity to do that? We certainly feel like we have the capacity to do that. We will be -- we're significantly under-levered, and this next dropdown transaction is likely to eliminate leverage at the parent. And so the parent still has some leverage capacity, and Mark, where he talked about the proceeds from the dropdown transactions over time. So we said we can fund our growth projects. We have a balance sheet with considerable dry powder. And in our view, as we look at the share price today relative to what we think is the intrinsic value of SXC, we felt like the first logical step was to execute this repurchase program. I think in the future, I mean, I anticipate having discussions about dividend policy with the board because I think certainly, we think we have the capacity to initiate that. But I don't want to get ahead of the board, Neil. I think it's something that's very important that the board decide on. But I certainly think we believe we have the capacity to both fund growth projects, repurchase shares and pay dividends. I mean, I think we have the capacity to do all of those things within a capital allocation framework, but I don't want to get ahead of my board.

In terms of tuck-in M&A at the MLP, earlier this year, you identified 12 different potential opportunities. Can you give us an update on where you stand with those opportunities and how we should think about the potential for incremental deals toward the back end of the year?

All right. Well, I'll let Mark -- I'll ask Mark to take that on.

Yes, so Neil, that was our starting point in terms of looking at terminal assets. We continue to be very busy on the M&A front. We don't have anything to announce today, but I'd say that was the journey that we started with. Some of those items have fallen off the list. We've added Otis [ph] to the list, and I would say we remain very active on M&A with a specific focus in Coal Logistics because we believe this is our most logical area to grow through M&A directly into the MLP.

Perfect. Then last question is what is -- can you talk about the different ways you could structure a coal sale? I know specifics are hard, but just philosophically. And then can you comment on whether the buyers are strategic or financial players?

We said high-quality bidders. That doesn't mean to say the financial bidders are not high quality so it's not a pejorative statement. But the -- we do have a number of bidders, and by and large, they're strategic, which is what we thought logically was what we would see. So what we're seeing is the bidders are strategic. So structuring is -- now we've moved into the bit of the world of conjecture. So don't misread me by saying this is where we think we're going to go. But I think it could involve cash consideration, likely to involve some assumption of liabilities. And we do have liabilities. If you think about our liability structure, we don't have large liabilities, but we've asset reclamation liabilities, which usually naturally flow with the mine. We have post-retirement healthcare liabilities that are capped, frozen and are winding down over time, which may or may not actually go with the transaction. And then finally, you have black lung, both at the mines themself and Jewell, but we also have some in the corporate segment related to mines in Kentucky, which are mined by Sunoco decades ago that we have in our corporate segment. Some portion of that might actually go with the transaction as an assumption of an obligation. There would likely be a -- we will look to a buyer and likely to have a buyer have a -- supply a coal agreement -- excuse me, supply agreement to our Jewell Coke plant because in fact, historically, the majority of the coal that we source at Jewell Coke is sourced from our own captive mine. So I think any transaction is likely to have a supply agreement as part of that. And I think it's quite clear to us that the bidders that are looking at this are interested in that coal supply agreement. I think it's been a positive. The details of what that coal supply agreement look like are yet to be worked out. Diligence is underway. We've had a large number of parties with management meetings, as well as site business, and we have several more to go actually. So we think we've got high-quality bidders. We think there's reasonable interest. I think you can logically assume that whatever the consideration is received, it was less than the carrying value of the business. Hence, the impairment charge is also -- frankly, the impairment charge is also driven by a lower pricing environment for coal that we've seen today than certainly we saw in the first quarter or even in last year. But that hopefully gives you an update of where we are.

The next question comes from Lucas Pipes from Brean Capital.

If I could maybe go back to Slide 12 where you kind of sketch the capital allocation. Do you have a sense in terms of how much -- what proportion of your capital available you would like to distribute versus reinvesting?

No, what I would say is we have -- Mark's already talked about it. He puts the numbers around it, of what the dropdowns might yield. Obviously, those numbers are depending on market factors -- a whole host of things. But if you have $135 million of remaining EBIT that are going to be dropped down, you're going to have a reasonable chunk of cash coming back to the parent. Some portion of that, I think, would be used tax efficient-wise to pay down the remaining debt of the parent. Some portion of that will take back units, but you could also assume that a reasonable portion of that would be cash. We model out doing a raven project, a new coke plant over a period of 3 years and potentially doing one other major project within the parent and funding that over a period of 3 years. And our modeling would suggest that we can do both of those things and return capital to shareholders and do so within a very -- within a reasonably conservative framework. But we don't have an approved capital project for any of those 2 things. So what we wanted to do with our board is show that the parent itself has the flexibility to both fund major capital projects that might need to be done at the parent and then drop down to the MLP and return capital to shareholders. And I think, certainly, the board was confident -- it shared our confidence, management's confidence in that. And then obviously, our first step was executing the repurchase program.

Okay, great. And you essentially answered my -- the second part to my question in terms of your reinvestment goals. Would you say that the #1 priority is the new Kentucky facility? And if you could, yes, first maybe comment on your priorities there and then maybe also give us an update in terms of potential customer commitments for that greenfield.

I think as I think about priorities, as I've said, we can do both things. But I think anything that a company can do to grow the EBITDA line, in other words, grow the enterprise value, I think, has high priority, assuming you do on a reasonable economics, which we wouldn't do the project if we didn't have reasonable economics. And I think that was the board's particular interest and management's interest in making sure that we could do that. So it will be a high priority for us. Now second, your question on customer commitment. We haven't kicked the project off because we don't have the customer commitments we would want. We continue to be in dialogue with customers about this. As we look out, I -- this project's not likely to be built without having a sizable chunk of it allocated dart [ph] in the middle. If you just look at the blast furnace landscape today, and particularly with the announcement on AK and Mountain State which I'll touch on, we felt consistently that if you just look at the landscape, ArcelorMittal would need to be an anchor customer in this plant. And I have had ArcelorMittal as one of our own current customers. We don't have a commitment from them. We remain in dialogue with them. There's nothing more really I can say about that. U.S. Steel, wouldn't say it's impossible, but it's unlikely based upon what I know about their business. With the Saarstahl [ph] asset changing hands to AK, and with AK buying the Mountain State asset, I mean, I would say AK is a great customer of SunCoke Energy today. I wouldn't eliminate the possibility, but they do have an asset that we think has some slack capacity and can be ramped up. On the other hand AK has, still has a coke plant that's also very aged. So I think that if there was a second customer, I think AK is still a possibility. Algoma, the company itself, as Algoma has to go through, it's got some challenges. We know they're coke-short, but you're not going to do a major project sole based on a sizable long-term commitment from Algoma until you actually see a fundamental change in their balance sheet. So I've now went through the entire landscape of what were 5 and are expected, assuming AK closes, to be 4 blast furnace manufacturers in North America. And I continue to believe that -- we think we're confident we'll do this plant. I'm not sure when. And as I thought about -- as I think about it, it's all about making sure the permits are done, which they are, make sure we preserve our flexibility, which we're doing, and then not spending any more capital until we actually have a customer lined up. And as I've said, I think logically speaking, if we're going to build the plant, I have a hard time seeing that we would do it without having ArcelorMittal as a significant customer. I can't speak for them though. Ultimately, they have to determine their own coke requirements, but I think between our -- what we know about their existing operations, obviously, they bought the Alabama facility and what they do for slab capacity over time, we think it's a reasonable possibility that we could do that.

That was very helpful. I think earlier you mentioned getting maybe up to the 70% level. Is that still the target in terms of customer commitments, 70%?

Yes, I think, I mean, what I've always said is that we want to have, I wouldn't say -- I'd said 60% to 70%. You'd want to have it committed. And our view is, frankly, if we were to do that over a project that's been built for 3 years -- over 3 years, pretty much what it'd be, 2 years, 2.5, there's some reasonable change. You'd have the rest of it sold by the time the plant's done. Obviously, we're talking about projecting coke requirements in the second half of this decade because this plant wouldn't be producing any meaningful coke until 2017. And so the dialogue that we have to have with our customers is really a very long term one. And you should just think about it, maybe be thinking about their coke requirements from 2017 to, call it, 2025 because you generally have a term contract as part of it, I think, at least that. So these are very long-term discussions, but nonetheless, we need to have them today. Otherwise, given the lead time of the plants, they could find themselves short, I mean, if they do have a requirement. So I think it's productive for us to have that dialogue. We will. We have the flexibility to fund it, but we're not going to spend any money on it until we have those commitments. And frankly, I think about 60%, 70% as being the right number with a reasonable insight into being able to sell the rest.

The next question comes from Sam Dubinsky from Wells Fargo.

Just a quick question on the coal business. So you wrote down the value of coal. When you sell that asset, does a tax shield go with the entity? Or can you keep the benefit to offset gains from future dropdowns?

So you've now taken me into the tax basis of our coal assets, and I am looking at my CFO here to see if he can answer that question.

I would say we haven't determined that yet, Sam, and it really will depend on how the deal is structured. My understanding, sort of at a high level, is we're really selling the assets of the business, and so to the extent there are any tax attributes, you would keep those. I think at this point, it's really too early to say.

Okay, great. And then if you sell the plant, can you just remind me if you still have to build logistics assets to take third-party coal? Or are you convinced that whoever buys this will be 100% -- will guarantee supply to you?

I think our view is that over time, we'll be spending money at Jewell Coke in order to be able to handle coal more logically. It's not clear to me, and I actually, I'd be surprised if the purchase agreement is for the entire requirements actually. I think we will build in flexibility over time for Jewell Coke to be buying coal, as well as sourcing it through the -- whoever is, I'll call it, a successor coal. And so we will be spending some capital at Jewell Coke over time in order to make sure it has the appropriate material handling, which very well could include making a decision with whoever the buyer is as to whether or not they want to use this prep plant.

Okay. Can you remind me what that spending is again or it could be determined by a buyer?

[indiscernible] Well, this will be determined by us at a coke plant, and we haven't -- frankly, I don't have that number. It's not a huge number. Basically, it's handling coal, and we do it in a lot of other coke plants. It's not such a big number.

I think what we had said previously, Sam, is that if we did a new prep plant, that would be about $70 million, and it would be about $20 million or so of CapEx related to material handling. We have not answered the question as to if you're simply moving to a more typical plant arrange -- coke plant arrangement, where your coal is sourced elsewhere and railed inbound, what a rail loadout would look like for the coke plant. So I think that's a different question.

Nor have we identified from any of the buyers what their plans are yet with respect to prep plant. We just -- that's premature.

Okay, great. And then just last question. I'm sure you addressed this before, but I didn't see the -- I wasn't on the first call, but what's the cadence of dropdowns? Do you guys ever outline a strategy like how many dropdowns you want to do a year now that the first one's kind of out of the way?

What we said was the dropdown plant itself, solely based on the dropdown plant, is we can support an 8% to 10% growth rate over -- between '14, '15 and '16.

Yes. A 3-year CAGR of 8% to 10%. Obviously, we're running above that today with the acquisitions we've done and some of the improvements we've rung out of the assets. And I think we will remain silent on specific timing of dropdowns given that guidance.

You can logically conclude that the majority of your coke plants would be dropped down over that period, otherwise, you can't make the math work. But the specific timing of transactions, we've been silent on to give ourself flexibility.

[Operator Instructions] The next question comes from Nathan Littlewood from Crédit Suisse. Nathan Littlewood - Crédit Suisse AG, Research Division: I just had a question for you on DRI. Just looking at the recent announcement from BlueScope Steel and North Star, I was wondering if you could talk about what you've learnt from that announcement and whether you could perhaps compare and contrast that project to some of the DRI opportunities that you guys have been looking at. And does that announcement from BlueScope North Star change at all the expectations you outlined earlier in the year, for there being a sort of 4 million to 6 million ton per annum DRI opportunity in North America?

I would say a very -- first, first point, that the use of DRI is going to be very specific to the firm or the mill. One of the things I've learned from understanding this is it's all a function of logistics, not all a function, but a substantial function of logistics, nat gas availability and then the question of ore versus scrap, and what your views are over time and how much you want to diversify. I wasn't surprised in North Star BlueScope's decision. I think it, yes, it would reduce the 4 million to 6 million, I mean, because they were actively looking at it. So as we look -- they weren't necessarily actively looking at it with us, but they were actively looking at whether or not they might use it. And so I think it would, on balance, reduce that -- the 4 million to 6 million opportunity. But what I've learned from dialogue with various different steel companies on the subject is it depends on their firm-specific procurement, and it really depends on scrap, scrap logistics and their ability to source ore competitively -- high-quality ore in order to do the DRI. So I do think that, that reduces the opportunity over time, but I don't think it means there won't be more capacity built. I do think, frankly, the fundamentals of low-cost gas, number one, and number two, what's interesting is recently, I don't -- you don't know if this is going to continue, but there's been a pretty significant gap created between ore prices and scrap prices. Shows you that if you can diversify, if you can hedge yourself, the DRI can provide a pretty powerful benefit to you as a steelmaker. So we remain positive. Interestingly, we did receive in the quarter the private letter ruling on DRI. So that it just would generate qualifying income, which we were encouraged by. So at this point, Lisa advises me there are no more questions. Again, we'd like to thank everybody for your interest in SunCoke Energy, for your support and for your ownership of our shares and coverage of our company and look forward to talking to you soon. Thank you.

Ladies and gentlemen, this concludes today's conference call. We thank you for participating. You may now disconnect.