Oct 24, 2014
Executives
Lisa Ciota - Director, Investor and Corporate Relations Fritz Henderson - Chairman and CEO Fay West - Senior Vice President and CFO
Analysts
Neil Mehta - Goldman Sachs Sam Dubinsky - Wells Fargo Lucas Pipes - Brean Capital Paul Luther- Bank of America
Operator
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
Lisa Ciota
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.
Fritz Henderson
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, we continue to negotiate with prospective buyers of this business.
We do anticipate a transaction by year end. It’s not a certainty.
But we continue to be constructive about the interest in this asset, the seriousness of the bidders. We did as a result of the Board approving the sale in the third quarter reflect coal mining as a discontinued operation.
Fay, will take you through what that means for our results. In the quarter, we recorded an additional $16 million pretax impairment charge, related to the expected sale of the business, which reflects both expected selling costs associated with this business, as well as an adjustment to some of the impairment and carrying value -- relative to carrying value after the second quarter charges we took.
And lastly, we would expect as part of the transaction about $10 million to $15 million of exit costs, which would be largely severance, consent fees and some termination costs that would come as a result of the divestiture. We would expect those costs to be incurred in the fourth quarter of this year.
Finally, in terms of capital allocation, we did initiate our first quarterly dividend that was announced earlier this morning at $0.0585 per share of SunCoke. I will talk more about that later in the presentation.
But that was said at about roughly 33% of the GPLP cash flows that SunCoke earn from SunCoke Energy Partners. So we are very pleased to be able to initiated dividend first in our history.
And then we did complete recently the ASR program. You recall in the second quarter we announced $150 million share repurchase program, which was done in the third quarter, and we announced that $75 million of that would be done on an accelerated basis and that was completed in October.
At this point, I’m going to turn it over to Fay.
Fay West
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, an improvement from the prior year quarter. This increase was based on strong Domestic Coke performance, primarily from improvements at Indiana Harbor.
Additionally, the third quarter benefited from the inclusion of the fourth quarter results for our Coal Logistics operations. You will recall that we acquired Lake Terminal in August of 2013 and KRT in October of 2013.
So comparison between periods was impacted by the timing of these acquisitions. Corporate costs were also lower compared to the prior year which included M&A cost of roughly $2.4 million related to the Coal Logistics acquisition.
EPS from continuing operations was $0.21 in the third quarter, an increase of $0.07 from the prior year. EPS benefited from strong adjusted EBITDA but was also impacted by higher non-controlling interest and higher taxes.
Given our current presentation of continuing and discontinued op, I would like to explain the loss in the second quarter of 2014. As I mentioned previously, certain assets and liabilities that will not be part of the potential coal sale have been reclassified into the corporate and other segment.
And although we have identified these legacy costs for purposes of adjusted EBITDA and have excluded them from that calculation, we cannot exclude them from the GAAP measure of earnings per share. As a result, the impairment loss taken on the coal prep.
plant in the second quarter is included in EPS from continuing operations as we have referenced in the footnote on this slide. Finally in terms of guidance, we are reaffirming our 2014 outlook for adjusted EBITDA from continuing operations of $235 million to $255 million.
Our full-year guidance for consolidated adjusted EBITDA which is an all-in number and includes continuing operations, discontinued operation and legacy costs remains in the $220 million to $240 million range, but we have recently seen some adverse trends in claim approval rates and discount rates related to our black lung liability. We believe that we could see a potential charges of approximately $8 million in the fourth quarter, which is when we receive our final actuarial report for this liability.
These adverse trends were not contemplated when we set out our full-year consolidated adjusted EBITDA guidance and could result in consolidated adjusted EBITDA at or below the low end of our current guidance. Turning to the next chart on page five.
We had a strong quarter in terms of operating results. Adjusted EBITDA from continuing operations increased 33% over the prior year.
Performance was driven by solid Domestic Coke result, the benefit of a fourth quarter Coal Logistics as well as lower corporate costs. From a Domestic Coke perspective, both volume and yield at Indiana Harbor improved.
Indiana Harbor also benefited from the favorable impacts of our new contract, which was effective October 1st of 2013. The rest of our domestic cokemaking business is up slightly year-over-year and I will take you through the bridge on the next chart.
Corporate costs are down versus the prior year which included M&A cost associated with the acquisition of our Coal Logistics businesses. Also contributing to the decrease are lower employee cost.
You will recall that we took some restructuring actions earlier this year at our corporate headquarters and we are now seeing this benefit in our current quarter results. We estimate that the cost savings to be approximately $4 million annually.
EPS from continuing operations was $0.21 and I will take you through that bridge on the future chart. And finally discontinued operations reported a loss of $18.5 million or $0.26 per share.
These results included an additional impairment charge on the coal business. And as Fritz discussed, we classified the coal business to discontinue app -- discontinued operation and had to evaluate the carrying value of the asset to the fair value less cost to sell, which includes anticipated legal and banker fees.
The third-quarter charge reflects these estimates. Turning to the EBITDA bridge on chart six.
Again we reported adjusted EBITDA from continuing operations of $68 million versus $51.1 million in the prior year. Excluding our Indiana Harbor operations, the domestic coke operations were up slightly year-over-year.
We saw improvements in yield in volume at our Granite City operations but volume in yield were down at our Haverhill operation. The volume shortfall was primarily related to the timing of Coke shipment.
We should see this sales activity place in the fourth quarter. And while we are still above our benchmark yield at Haverhill, we are slightly below the prior year -- prior year.
We have been working on addressing the lower yield and have seen recent improvements that we are trending in the right direction in the fourth quarter. With respect to Indiana Harbor, results were $7 million better than the prior year and as you could see on the chart related to higher volume and better yield as well as the impact of the new contract.
International Coke is favorable year-over-year with improved results in both Brazil and India. Favorable volumes contributed to the increase in Brazil and year-over-year increases in India were driven primarily by unfavorable foreign currency impacts experienced in the prior year period.
Once again, the quarter benefited from the contribution of a full quarter coal logistics and reduced corporate costs. Turning to the EPS bridge on slide seven, diluted EPS from continuing operations was $0.21, an increase of $0.07 from the prior year quarter.
As you see adjusted EBITDA is favorable, but is offset partly by a number of items. Depreciation and amortization is up $0.05 versus the prior year, a portion of which is attributable to accelerated depreciation at Indiana Harbor, which was recognized in connection with certain refurbishment work on the oven.
The balance of the increase is attributable to the inclusion of the coal logistics operations. Non-controlling interest increased due to the impact of the second quarter dropdown of assets into SXCP.
Lastly, tax expense was higher this period based on higher earnings. Also our effective tax rate was higher due in part to the absence of certain tax credits which expired in 2013.
The impact of legacy and financing costs was about 1% on a year-over-year comparison. Turning to chart eight, our coke production for the quarter was at 1,090,000 tons and is up 9,000 tons versus the prior year.
Our adjusted EBITDA per ton was $67 in the quarter. This is the highest adjusted EBITDA per ton since our IPO.
We expect our full year adjusted EBITDA per ton to be in the range of $60 to $65, which reflects the impact that adverse weather had on our first quarter production. Turning to the next chart, on Indiana Harbor performance, we continue to see an improvement in production yields as well as operating results.
Our third quarter production of 275,000 tons was in line with the guidance we provided last quarter. Additionally, we are running above the benchmark yield.
We are slightly lowering our fourth quarter production guidance by 10,000 tons to a range of 285,000 to 295,000 tons. From a full year adjusted EBITDA perspective, we expect to be at the low end of our previously disclosed range of $20 million to $25 million.
Further, we expect that adjusted EBITDA for Indiana Harbor will be up $15 million to $20 million in 2015. We expect production volumes to increase to capacity of 1.22 million tons.
Based on the terms in our new contract, the recovery mechanism for operating and maintenance costs is changing from essentially a pass-through mechanism subject to certain limitations in 2014, to a fixed rate recovery mechanism in 2015. And although, we expect that we will see a significant decrease in the absolute spend on operating and maintenance costs in 2015.
Based on our new contract provisions, we anticipate being in an unfavorable O&M recovery position in 2015. This under recovery is built into the expected 2015 adjusted EBITDA range.
Turning to the next chart, adjusted EBITDA from discontinued operations was a loss of $3.2 million compared to a loss of $0.1 million in the prior year. Once again, this amount includes the coal operation but excludes asset impairments, exit costs and legacy costs.
From an operations perspective, we continued to experienced price headwinds and coal sales prices on a per ton basis have decreased by approximately $18 from the prior year quarter. The chart on the right of the page begins with our previous coal guidance and adjusts for the presentation changes related to discontinued operations and legacy costs.
What this shows is that we are essentially in line with our previous guidance and are just tightening the range. We expect to have a loss between $10 million and $13 million.
Please note that this range does not include any impairment or exit costs. Turning to liquidity on chart 11, we ended the quarter with a combined revolver capacity of close to $400 million and approximately $115 million in cash, which decreased from the second quarter balance of $204 million.
While we did report positive cash flow from operations, we initiated the $75 million accelerated share repurchase program in the third quarter, which when coupled with CapEx and distribution to SXC shareholders reduced our overall cash balance. The accelerated share repurchase program was completed after the quarter end and in October, we took delivery of 3.2 million shares at an average share price of $23.27.
CapEx for the quarter was $26.4 million, the majority of which was related to the environmental remediation project. We have reduced our full year CapEx guidance from $138 million to $128 million, primarily due to the reduced spending in our coal operations.
Additionally, we received approximately $1.8 million in proceeds from SXCP’s ATM program, which we announced earlier this quarter. We issued approximately 63,000 units through the $75 million program.
The ATM is a low-cost tool to raise equity and given our plans for future dropdowns to the SXCP, we view this is another tool to finance growth and expect to use this program opportunistically. With that, I will turn it over to Fritz.
Fritz Henderson
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 to 33% of GPLP cash flows and we think that’s a logical thing for us to do as we think about moving to being a pure play GP over time. That’s a little bit over 1% dividend yield relative to the share price prior to the announcement.
And then finally, with respect to share repurchases, we mentioned, as Fay reviewed, we did complete the first half of the share repurchase program when we took delivery in October of 3.2 million shares and we preserve the flexibility to repurchase another $75 million going forward in the open market. So we really think that the capital structure of the company and the structure of the two capital structures if you will SXCP and SXC provide the optimal structure for us to pursue growth while allocating capital to our shareholders.
Wrapping up the quarter, 2014 value creation scorecard if you will, we think we continue to take action to unlock shareholder value and transition the company to more of a pure play GP. Our business starts with operational excellence.
We did and we continue to recover from the weather challenged first quarter. We have seen improved sequential quarter and year-over-year performance improvements at our Indiana Harbor plant.
In terms of major projects, we have largely executed the oven repair programs, included in the initial capital projects at Indiana Harbor. We have some remaining work that we are doing in the fourth quarter and then in the next year, which a lot of that would be expense-related, hence the cost on recoveries we look at ’15 versus ’14 at Indiana Harbor, but that project is moving along well.
And then the gas sharing project at Haverhill 2 is ahead of schedule. We cut that project -- we cut the Haverhill 2 gas sharing initiative over in the third quarter.
We continue to test the capability of the system, but we feel like we are ahead of schedule in that project, as we do planning and do work regarding Haverhill 1 and we prepare ourselves for implementation at Granite City. So the business begins and ends with operational excellence.
In terms of structure of the business, we did execute our first dropdown in May. We expect to exit the coal business by year end and we are working hard to get that accomplished and we continue to assess our timeline and future dropdowns.
I was asked earlier this morning in the SXCP call what that -- what our timing might be in that regard. What I said was we are doing the work to prepare and be ready to do future dropdowns.
The next logical asset for us to consider would be our Granite City plant and so we are doing carve-out financials. We are doing all the things we think are necessary to be prepared if the market is favorable to move forward on that.
I will spend a minute here talking about the other assets because I didn’t cover that this morning. If you think about the Jewell plant, it’s logical to consider the Jewell plant post the coal divestiture, as we’ve factored in whatever cost might be necessary to set up Jewell coal on the standalone basis and untangle if you will Jewell coal from Jewell coke.
So we are doing the work to have Jewell ready to go, but it would be logical for that to happen after Granite City. And then finally Indiana Harbor, what we would like to see is we would like to see two solid quarters of sustained operating performance post project implementation I think prior to considering Indiana Harbor, but we feel like as I mentioned, and as Fay reviewed earlier, we think our Indiana Harbor plant is moving along its timeline to become a full dues paying member of the coke plant fraternity within SunCoke Energy.
And then finally in terms of allocating capital, we are pleased to be able to declare our first quarterly dividend and complete half of our share repurchase program. So thank you very much.
At this point, we will open it up for questions.
Operator
(Operator Instructions) And it looks like we have our first question from Neil Mehta with Goldman Sachs. Please go ahead.
Neil Mehta - Goldman Sachs
Good morning, Fritz.
Fritz Henderson
Good morning Neil.
Neil Mehta - Goldman Sachs
Good morning, Fay.
Fay West
Good morning.
Neil Mehta - Goldman Sachs
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?
Fritz Henderson
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.
Neil Mehta - Goldman Sachs
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?
Fritz Henderson
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 cash flow and qualifying income immediately. We come back to Neil, the question of Greenfield plant because I think, the one point I'd like to make this morning is the backdrop for our customers and the backdrop for our business.
Today, it’s probably the best it’s been since I have been at SunCoke. As I look at the demand factors for the blast furnace steelmakers that we serve, demand is whether it's seasonally adjusted annual rates in auto.
The Architectural Building Index is trending positively GDP in the U.S. I think, in general, the demand factor is affecting steel production and therefore in the blast furnace are positive.
Probably the most constructive we’ve seen since, again, I have been with the company. Commodity tailwinds, well it represent the headwind if your commodity -- if you’re miner and we’ve certainly seen that at our mining business.
It represent tailwinds to our blast furnace steel maker, whether it’s on the carbon side, coal and therefore coke, or on the ore side. Obviously, our customers have different levels of integration in ore but ore price is falling.
If you look at the competitors for the blast furnace, it’s pretty positive. The consolidation of the industry that we’ve seen, which has been quietly done but its pretty meaningful if we look at what's been accomplished in ‘14.
We think our customers and you look at the equity markets and the debt market, their views of our customers, U.S. Steel, ArcelorMittal and AK Steel, again, it’s been as constructive as we’ve seen in the recent history.
So what does that mean for potential coke demand going forward? We were just excited about talking about our new project with our customers.
And it’s interesting when I saw the announcement on Essar Algoma and potential of recapitalization of Essar Algoma. I just think that the environment is reasonably good for us to be able to build the next generation coke plant.
And from a return of capital perspective and I call it strategic coherence, that is the most logical, we think, we can do to grow our EBITDA over the longer term.
Neil Mehta - Goldman Sachs
Make sense. Thank you, Fritz.
Thank you, Fay.
Fritz Henderson
You welcome.
Operator
Thank you. Our next question is from Sam Dubinsky with Wells Fargo.
Please go ahead.
Sam Dubinsky - Wells Fargo
Great. Thanks guys.
Fritz Henderson
Hey, Sam.
Sam Dubinsky - Wells Fargo
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?
Fritz Henderson
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.
Sam Dubinsky - Wells Fargo
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.
Fritz Henderson
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.
Sam Dubinsky - Wells Fargo
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?
Fritz Henderson
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.
Sam Dubinsky - Wells Fargo
But as of now, you still feel pretty comfortable with the trajectory and all that?
Fritz Henderson
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.
Sam Dubinsky - Wells Fargo
Great. Congrats on the really strong quarter.
Thank you.
Fritz Henderson
Thank you.
Operator
And thank you. Our next question comes from Lucas Pipes with Brean Capital
Lucas Pipes - 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 --?
Fritz Henderson
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.
Lucas Pipes - Brean Capital
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?
Fritz Henderson
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.
Lucas Pipes - Brean Capital
Sounds good. Thank you.
Fritz Henderson
You’re welcome.
Operator
(Operator Instructions) And our next question comes from Paul Luther with Bank of America. Please proceed.
Paul Luther- Bank of America
Thanks for taking the call. A question on the Kentucky greenfield, is there anything new or an update on that or any new consideration on customer commitments and such before going forward?
Fritz Henderson
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.
Paul Luther- Bank of America
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?
Fritz Henderson
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.
Paul Luther- Bank of America
Got it. Great, thanks, Fritz.
That's all for me. Thank you.
Fritz Henderson
Thanks, Paul.
Operator
And thank you. We have no further question at this time.
I will now turn the call over to Fritz Henderson for closing remarks.
Fritz Henderson
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.
Operator
And thank you, ladies and gentlemen. This concludes today’s conference.
Thank you for participating. You may now disconnect.