Jan 29, 2015
Executives
Lisa Ciota - Frederick A. Henderson - Chairman, Chief Executive Officer and Chairman of Executive Committee Fay West - Chief Financial Officer and Senior Vice President
Analysts
Brett M. Levy - Jefferies LLC, Fixed Income Research Nathan Littlewood - Crédit Suisse AG, Research Division Lucas Pipes - Brean Capital LLC, Research Division
Operator
Welcome to the SXC earnings call. My name is John, and I'll be your operator for today's call.
[Operator Instructions] Please note that the conference is being recorded. Now I'll turn the call over to Lisa Ciota.
Lisa Ciota
Thank you, John, and good morning, everyone. Thank you for joining us on the SunCoke Energy Fourth Quarter 2014 Earnings and 2015 Guidance Call.
With me are Fritz Henderson, our Chairman and Chief Executive Officer; and Fay West, our Senior Vice President and Chief Financial Officer. Following our remarks today, we will open the call for questions from you.
This conference call is being webcast live on the Investor Relations section of our website at suncoke.com, and there will be a replay available on our website. If we don't get to your questions today, please feel free to call us on the Investor Relations phone line (630) 824-1907.
Now before I turn the call over to Fritz, I want to remind everyone that the various remarks we make about future expectations constitute forward-looking statements, and that the cautionary language regarding forward-looking statements in our SEC filings apply to our remarks today. These documents are available on our website, as are reconciliations to any non-GAAP measures we discuss on the call today.
Now I'd like to turn the call over to Fritz Henderson.
Frederick A. Henderson
Good morning. Thanks for joining us this morning.
We have a lot to cover today between discussing both the fourth quarter earnings as well as our fiscal 2015 targets. A number of things going on in the business, so Fay and I will go back and forth as we go through this presentation, but some areas -- we usually get through the presentation relatively quickly.
We will have plenty of time for Q&A at end of this call, but there are some areas we're going to slow down a little bit today to make sure we cover in detail how we've handled certain things particularly around coal and a couple of other things in our business. So a little bit of change today from how we've handled prior calls.
But let me start with Chart 2, which is 2014 overview. Operating performance-wise, as we look at the year, and particularly, we look at the fourth quarter, I would say, we sustained a solid year from an operating safety and environmental perspective in coke, logistics and coal.
We recovered through the year from what was a very weak first quarter that was impacted by weather. You'll see when we look at adjusted EBITDA where we landed, but I would say it was a year where we were recovering from the first quarter throughout the year.
The one area where we fell short of our objectives was in the Indiana Harbor refurbishment turnaround. We did complete the project, but the turnaround itself is still a work in process.
And while we did deliver improved results relative to the prior year, we fell short of our guidance, and it's taken longer than we expected, and I'll come back to that later in the presentation. We did complete the construction of the Haverhill II gas sharing project.
That was done ahead of schedule. And we're executing against that project, which is another major project that's affecting both the Haverhill and subsequently the Granite City site.
So we look back at operating performance, that's a synopsis of '14. If we look at '15, excuse me, from a restructuring perspective, we did execute 2 drop-down transactions, including most recently in January this year, 75% of Granite City, but we were not able to sell the coal mining business as planned.
We initiated that process very promptly after the exploration of the tax sharing agreements in the early 2014. The team that worked on the transaction, I think, did a very professional job.
We were professionally advised. We talked to a whole host of parties about the business, but in the end, we weren't able to do the transaction, driven in large part by the continued negative backdrop from met coal pricing.
While our team has done a good job from a productivity perspective, and we'll actually talk about their results in 2014, I would say that in a backdrop of met coal pricing of about $90, we're a high-cost, mid-vol, deep room-and-pillar miner, and it made the transaction the way we wanted to structure it not feasible. And so instead, we've initiated a rationalization plan to scale back the operations, took the first step of that in December.
Fay will talk about it later, but we took the second step today to rationalize our coal mining operations, and we did record about, in 2014, $150 million of noncash impairment to in effect bring in the carrying value of the coal business on our books down to the net realizable value. We do continue to pursue M&A efforts, activities.
A number of the activities that we focused on in '14 were in the area of coal and coal handling. We broadened the lens, and I'll spend some more time talking about that later in the presentation, but 2014 -- 2013, we did 2 small deals.
2014, we weren't able to close any deals, but that doesn't mean that we're backing off at all. In fact, we're reinvigorating that effort as we go into '15.
And then finally, relative to our Indian JV, while the India JV has been able to tread water, it's the way I would describe it, operationally and from a cash perspective, we did in the fourth quarter, take about a $30 million noncash impairment. That business has been most significantly affected by Chinese coke prices.
And in effect, as we looked at it relative to the expectation we had going into the joint venture, it's been profitless. In other words, we've been able to tread water, but given where coke prices are, we measured the future potential performance of the business and thought that a noncash impairment was warranted and we recorded that in the fourth quarter.
And then finally, in terms of capital allocation, 2014 was a year that brought the first quarterly cash dividend at SXC. We initiated a $150 million share repurchase program -- excuse me, approved a $150 million share repurchase program, executed $75 million of that or 1/2 via an ASR.
We have another $75 million authorized for repurchases as we go into '15. And we announced this morning that the first chunk of that or $20 million was going to be done by an ASR within 2 days of the -- of today's call.
So we are proceeding for another $20 million of the remaining $75 million as we speak, if you will. GP/IDR cash flows in 2014 reached $2.1 million.
They were a very small number in 2013. They were at $700,000.
So we did see a significant uptick as we moved into the splits. And as we think about going forward further drop-downs, and we'll see continued meaningful progress there.
Fay will talk about that a little bit later. And finally, we did delever -- continue to delever the SXC balance sheet.
We ended the year with a solid cash position with approximately $400 million of revolver capacity between SXC and SXCP, largely undrawn and with a capital structure, which I think facilitates both investment and growth in the business organically or through M&A and provides flexibility to provide further meaningful capital allocation and specifically dividends and share repurchases going forward. So we felt like we ended the year in 2014 with a stable balance sheet that will allow us to finance our business going forward.
At this point, as I look at the Granite City transaction, as summarized, and I won't spend a lot of time here but I will reinforce that in January of this year, we did execute the 75% drop-down at Granite City. It was executed in terms of total -- as we think about it in total value at about 9.9x Granite City's EBITDA broken down between the direct transaction value, the value of the units over time from the accretion and the value of the GP/IDR cash flows.
We've talked through this methodology in the past. We've used the same methodology here as we look at the value of the Granite City drop.
We were pleased with the execution of the Granite City drop. On the SXCP call earlier, I had a chance to talk more specifically about it, but I think -- by the way, we both tilted the capital structure of the drop more toward debt, less toward equity.
We took back the equity units of the parent. The debt execution was done well.
The yield, at worst, was within expectations, a little tighter than expectations, and the level of accretion was something we felt was attractive. So we were pleased to be able to get that done in 2015 already.
And it's our intention as we look at the rest of 2015 to execute at least one other drop-down transaction through 2015. Next chart, Page 4 is a broad summary of both the fourth quarter and the calendar year 2014 results.
If we look at the fourth quarter, adjusted EBITDA from continuing ops was up $7.2 million, and it was up $16 million in the fiscal year. In the quarter, it was really driven by Indiana Harbor, Jewell Coke and Brazil plus lower corporate costs.
The calendar year benefited also from the full year's inclusion of Coal Logistics. These results were at the lower end of our $235 million to $255 million guidance that we provided in July of '14, so that's where we ended the year.
On a consolidated basis, we ended the year at $210.7 million. That did reflect a $12.3 million charge we took for black lung evaluation, which we have previously discussed.
The black lung charges that we took brought us below the $220 million to $240 million guidance range that we had provided earlier in the year and it was -- as I think about it without the black lung, we were in the lower end of that range as well. And then, finally, in terms of earnings itself, EPS from continuing ops, reflects both black lung as well as the India charge that I mentioned, and the coal impairments we took through the year and the prep plant impairments.
We took further impairments in the $150 million, if you will, in the fourth quarter, which affected net income as well as the accelerated depreciation at Indiana Harbor. At this point, I'll turn it over to Fay.
Fay West
Thanks, Fritz. Just to anchor the presentation material, I would remind you that in the third quarter, we classified our coal business as discontinued operations, and we have restated prior periods to conform to this presentation.
Also, certain liabilities and assets that were previously included in the Coal segments are not part of the coal disposal group and have been characterized as legacy costs. These assets and liabilities consist primarily of the existing coal prep plant assets, asset reclamation liabilities, black lung liabilities, pension, OPEB and workers' comp.
Given that these legacy items are not directly related to our ongoing operations and in some cases will be settled or demolished in 2015, we have excluded them from adjusted EBITDA from continuing operation. So adjusted EBITDA from continuing operations, which is a non-GAAP financial metric, excludes the impact of impairment charges, legacy costs and discontinued operations.
The GAAP measures of net income and net income from discontinued operations do include the impact of impairment charges, legacy costs and exit costs. Adjusted EBITDA from continuing operations for the quarter was $70 million.
This is a $7.2 million improvement over the prior year quarter. This increase was based on stronger Domestic Coke performance and lower corporate costs.
On a full year basis, adjusted EBITDA from continuing ops was $237.8 million, an improvement of $16 million from the prior year. This is mainly due to the increased contribution from Indiana Harbor, and the full year contribution of coal logistics.
I will take you through the detailed adjusted EBITDA bridges on the next 2 slides. We recorded a net loss from continuing operations attributable to SXC of $25.3 million for the fourth quarter, and a loss of $20.1 million for the full year.
Both the quarter and year the reflect the impact of the impairment of our joint venture in India as well as higher charges related to the black lung liability. When combined, these 2 items had a drag of roughly $32 million on an after-tax basis to net income.
As we discussed in our third quarter call, we have experienced adverse trends in the approval rates for claims, eligibility status and discount rates for black lung. As a result, we have taken a significant charge in the fourth quarter to reflect new these assumptions.
Additionally, based on current market factors and a recent history of losses as well as anticipated losses in 2015, we evaluated the recoverability of our investment in India. In 2013, China eliminated its export tariff on coke, which drastically reduced prices for Chinese coke and increased exports from China.
This increased import competition from China continues to depress coke pricing in India, which has resulted in very weak margins and losses for our joint venture. This along with headwinds from iron ore mining restrictions were the primary drivers of the $30.5 million impairment that we recorded.
We essentially wrote-off the goodwill and certain intangibles that were recorded as part of the purchase accounting in 2013, and our current investment in the joint venture is approximately $22 million. While we are pleased with the operations of the joint venture, which has been running efficiently and cost effectively, the results have been disappointing.
And finally, discontinued ops reported a loss of $40.1 million in the fourth quarter and $106 million for the full year. Both the quarter and the full year reflect the impact of asset impairments, severance and other exit costs.
I'll just note that we have included a chart in the appendix to this presentation on Page 36 that details by quarter and financial statement classification all of these unusual items. Turning to the next chart.
Again, adjusted EBITDA from continuing operations for the fourth quarter was $70 million versus $62.8 million in the prior year. As you can see in the chart, the largest increase is attributable to Indiana Harbor, specifically an increase in volumes and yield as well as better O&M recovery.
The balance of the coke business was essentially flat with the prior year. The prior year results included a coke quality claim accrual of $2.5 million at Jewell Coke, which provides a favorable comparison to the current year.
This was offset by higher outage costs at our Granite City operations. Corporate costs were down versus the prior year, due mostly to lower employee costs.
You may recall that we took some restructuring actions earlier this year at our corporate headquarters, and we are seeing the benefit of this restructuring activity in our current quarter results. International coke was unfavorable as improved results in Brazil were more than offset by losses in India.
Coal logistics had higher O&M in the quarter and corporate benefited from lower employee costs, as mentioned. Working from adjusted EBITDA from continuing operations to consolidated adjusted EBITDA, legacy costs were a loss of $13.3 million and discontinued operations was a loss of $4.9 million.
Bringing consolidated adjusted EBITDA to $51.8 million, the biggest driver in legacy costs related to the charges for the black lung liability, I just mentioned. The adjusted EBITDA loss for discontinued ops reflects coal sale price headwinds.
On average, there was a $17 per ton decrease in the average coal sale price as compared to the prior year. This impact was largely offset by lower cash costs in the coal operation.
Looking at the full year adjusted EBITDA on the next slide, adjusted EBITDA from continuing operations for the full year was $237.8 million versus $221.8 million in the prior year. Domestic Coke, excluding Indiana Harbor, was down compared to the prior year, and reflects the financial impact of the extreme weather conditions that we experienced in the first quarter, specifically the impact on volumes and O&M expenses.
With respect to Indiana Harbor, despite lower volumes resulting from Q1 weather impact, results were $13.2 million better than the prior year. As you can see in the chart, the favorable impacts of the new contract as well as higher yields and better O&M recovery benefited the year.
International coke was unfavorable year-over-year, as favorable volumes in Brazil were more than offset by losses in India, and we also benefited on a full year basis for the full year contribution of coal logistics. Working from adjusted EBITDA from continuing operations to consolidated adjusted EBITDA, legacy costs were a loss of $17.1 million, and discontinued ops was a loss of $10 million, bringing consolidated adjusted EBITDA to $210.7 million.
Once again, the biggest driver in legacy costs related to black lung, but it also included significant workers' comp costs. Adjusted EBITDA for discontinued ops reflects similar coal price and production cost dynamics, discussed in the quarterly comparison.
Moving to the next slide. Diluted EPS from continuing loss was a loss of $0.38 per share compared to diluted EPS of $0.22 per share in the fourth quarter of 2013.
The factors that impacted adjusted EBITDA are also impacting EPS, but I want to highlight some of the other drivers. Depreciation and amortization is up $0.09 versus the prior year, a portion of which is attributable to accelerated depreciation at Indiana Harbor.
This additional depreciation was recorded in connection with certain refurbishment work performed on the ovens. We also recognized an asset impairment on the existing coal prep plant assets.
These assets are not considered part of that coal disposal group and are, therefore, part of continuing operations. And as part of the coal rationalization plan, we intend to demolish this plant in the first half of 2015.
We also wrote-off capitalized costs associated with the coal prep plant that we had previously contemplated constructing. Lastly, looking at tax expense, that was lower this quarter than the prior year and it was based on lower overall earnings.
Moving to the full year EPS loss. Diluted EPS from continuing operations on a full year basis was a loss of $0.29 compared to earnings of $0.58 in 2013.
The same factors that impacted the quarter are reflected in the full year EPS. Also impacting year-over-year comparisons for EPS is the incremental depreciation and amortization for a full year of coal logistics.
And one additional item of note is that EPS -- the EPS impact on interest expense and financing costs, as you can see in the chart, that extinguishment cost and the call premium cost decreased EPS by $0.17. These costs were incurred in connection with the drop-down of the assets to SXCP and the repayment of parent company debt.
Moving to Chart 10. On a full year basis, adjusted EBITDA per ton was $59, just below our range of $60 to $65 per ton.
And as the chart illustrates, it was greatly affected by the impact of Q1 weather. Adjusted EBITDA per ton in the fourth quarter was $58 per ton and reflects the operational performance at Indiana Harbor, which is discussed more on the next chart.
Moving to Chart 11. The graph on the right chart is quarterly coke production for Indiana Harbor, and as you could see, our fourth quarter production was below our previously guided range of 285,000 to 295,000 tons.
While we have seen really good yields at the plant, we are disappointed with our fourth quarter results. We experienced a setback in our pushing cycle, specifically the number of ovens pushed per day.
The number of ovens pushed per day was below our target, and inconsistent throughout the quarter, which resulted in lower production. The disruption in cycle time was caused by 2 major equipment failures.
We had 2 door machine fires in the fourth quarter: One is unusual, but to have 2 is really unprecedented. The equipment failures coupled with the challenges associated with the start-up and commissioning of the newly designed PCM really impacted quarterly results causing a production shortfall of approximately 20,000 tons.
Operationally, we are working towards normalizing our push schedule to make it more consistent, which in turn should address our production issue. We are working on addressing existing equipment reliability issues and maintenance practices that will benefit from a normalized push cycle and are working our way through the commissioning challenges that we have faced.
We will also prioritize the completion of floor and sole flue replacements in 2015, which is included in the CapEx number of -- 2015 CapEx number of $15 million, which is significantly below 2014 spend. We have continued to experience these issues in January and expect that we will be between 30,000 to 40,000 tons below run rate in the first quarter.
We believe that the plants can achieve the in-play production capacity of 1.22 million tons albeit a little later than we originally anticipated. Moving to Slide 12.
This slide shows fourth quarter and full year net loss from discontinued operations reconciled to adjusted EBITDA from discontinued operations. I previously discussed the operational performance for coal operations.
Specifically, despite improved production costs, the coal operations continue to face coal price headwinds. On a full year basis, the adjusted EBITDA loss from discontinued operations was $10 million and was within our guided range of $10 million to $13 million.
Further, we recorded $133 million in asset impairment charges in the full year, $29.1 million of which was recorded in the fourth quarter. Based on the status of the sale process and the coal pricing environment, which deteriorated significantly in the fourth quarter.
We continue to assess the carrying value of the coal assets throughout the year and as they compare to market value. This actually resulted in impairments taken in second quarter, third quarter as well as in the fourth quarter.
The remaining carrying value of the coal operations is a net liability of roughly $18 million. Of that amount, PP&E is valued at less than $10 million.
In December, we announced our intent to downsize the coal mining operations and we will go into more detail on that in later slides. We had guided in December -- in a December press release that we would incur some onetime costs related to contract termination and employee severance costs.
And these costs totaled $17.6 million in the quarter and are within our guided range. We believe we may incur an additional $3 million to $4 million of exit costs in 2015.
But just to note that the employee severance costs, the charge taken in the fourth quarter, included the terminations that occurred in December as well as January. Turning to Slide 13.
We ended the year with a consolidated cash balance of $139 million, which increased from the third quarter and with a combined revolver capacity of close to $400 million. Positive cash flow from operations adjusted for noncash impairment charge was partly offset by CapEx of $15.8 million and $8.9 million in distributions to SXC shareholders as well as a $3.8 million dividend payment to SXC shareholders.
As Fritz mentioned, we initiated the SXC dividend here in the fourth quarter of 2014. CapEx for the full year was $125 million and just slightly below our guided range of $128 million.
With our strong cash position, we maintain essentially no net debt at the parent and have significant revolver capacity at both SXC and SXCP, which provides us with the flexibility to fund greenfield projects and/or M&A. With that, I'll turn it back to Fritz.
Frederick A. Henderson
Thanks, Fay. Turn to Page 15 on 2015 priorities.
Three important ones carry over from 2014. From an operating perspective, the objective is to sustain a high level of operating safety and environmental performance in our coke plants, and return Indiana Harbor to its name plate run rate.
And as we look at Indiana Harbor, the plant will run at the 1.22 million, but behind schedule, but our focus from an operating perspective is on the improvement in the execution of the Indiana Harbor turnaround and bringing it to where it should run. Second is executing the coal rationalization plan and then optimizing Jewell Coke on a standalone basis.
And we'll spend some time as we go through the '15 targets explaining the impact on both discontinued operations, in other words what remaining mining activities are going on, on the properties that we own as well as what's happening at the Jewell Coke plant. And then finally, from a -- from the gas sharing environmental project perspective, completing the construction by late in the year of the gas sharing project at Haverhill I.
We did that, completed the construction of the first part of that project at Haverhill II in 2014. So from an operating perspective, those are the priorities.
From a growth perspective, its pursue MLP-qualifying, industrial-facing processing and handling M&A opportunities. Growth is the third major priority for us in 2015.
A lot of activity has been -- a lot of activity in '14, that activity is only intensified in 2015, and the focus is really around activities that are: one, qualifying in nature; two, that -- as we look at it, ideally, provide a platform for future growth. I was asked earlier on a call from -- an SXCP call whether or not whether we might consider doing organic projects or new greenfield projects in businesses we've not been involved in the past.
I made the point on that call that our focus, in terms of entering new business lines, would be more on M&A and then look at growing organically once we're in those lines of business. I still think that's the right way to enter.
And then finally, continuing to pursue a greenfield project both in terms of the new coke plant in Kentucky and talk to our customers about 2015, maintain the dialogue about their long-term coke needs. We are ready with that plant from the standpoint of both permitting and then -- as well as engineering, but we're patient at the same time because we're not going to commence construction nor commit any capital to that plant without adequate and reasonable customer assurances in that regard.
And we work with 1 potential partner with respect to a new DRI facility, and that dialogue continues. And finally, in terms of the capital structure and the optimization of our capital structure, as I mentioned earlier, we do intend to execute at least one additional drop-down in 2015, that's our intent, and build upon our capital allocation strategy initiated in 2014 with respect to both share repurchases as well as dividends.
Fay?
Fay West
Okay. On Slide 16, looking forward to our 2015 Domestic Coke business.
We expect adjusted EBITDA to be in the $240 million to $255 million range as compared to 2014 adjusted EBITDA of $248 million. Adjusted EBITDA per ton is expected to be in the range of $55 to $60 per ton, and we expect to increase production from 4.3 million tons to -- we expect to increase production to 4.3 million tons, which is up from 4.2 million in 2014.
Our 2015 guidance does reflect the year-over-year improvement at Indiana Harbor, but we anticipated that we will be below our $40 million targeted run rate, and the next slide in the presentation covers Indiana Harbor in more detail. We anticipate that when IHO returns to run rate, we will be back within the $60 to $65 range for adjusted EBITDA per ton.
With regards to Jewell, we anticipate that as part of the coal rationalization plan, Jewell Coke will incur approximately $7.5 million in incremental costs necessary to operate as a standalone facility. Essentially, these costs, which were previously borne by Jewell Coal can be bucketed into 3 categories.
The first category is incremental employee costs. You can think of this as back office personnel, such as finance and HR that were previously shared with the coal mining operation, but will now be part of Jewell Coke.
This is approximately $1 million. The second category is related to blending and handling services.
Consistent with our other coke-making operations, Jewell Coke will incur blending and handling services. We estimate that this will be approximately $3.5 million.
And the last category, it's related to coal moisture. When other plants receives purchased coal, the market assumption is that moisture is approximately 7.5%.
Jewell Coke was previously purchasing coal from Jewell Coal at a 4% moisture rate, which is not the market rate. Bringing the moisture percentage to market will have approximately a $3 million impact to Jewell Coke.
For the balance of our domestic plants, we expect to achieve solid operating results with various puts and takes across the plants. Moving to the next slide.
With regards to Indiana Harbor, we expect adjusted EBITDA to be in the $25 million to $35 million range for 2015. This reflects the continuation of production challenges that we faced in the fourth quarter rolling into January.
As I mentioned, we expect Q1 to be 30,000 to 40,000 tons below run rate. I should note that we do have capacity across the fleet to cover any production shortfall, if needed.
Our other plants have demonstrated the ability to run above name plate capacity and contract max in the past. The operating environment in Indiana Harbor does remain challenged, but we are taking the right steps to address these challenges.
Specifically, the team is working on establishing consistent oven-push cycles even bringing in a fourth crew to help reduce cycle time. We're also working on mastering the new PCM and believes the modifications to retrofit the PCM are behind us and that we have addressed any related winterization issues with this new machinery.
Improving equipment maintenance practices and completing the floor and sole flue replacements is going to be a top priority for us as well. Stabilizing these operations is a real focus for the organization, and we have devoted significant resources to address these challenges.
One item of note is as we discussed in the third quarter, the economics of the cost recovery mechanism at Indiana Harbor is different in 2015. Based on the terms of our new contract, the recovery mechanism for O&M costs is changing from essentially a pass-through mechanism to a fixed-rate recovery mechanism in 2015.
And although we expect that we will see a significant decrease in the absolute spend on O&M costs in 2015, based our contract, we anticipate being in an unfavorable O&M recovery position. This under-recovery is primarily related to additional repair work on common tunnels and ovens as well as increase natural gas usage, and is built into the expected 2015 adjusted EBITDA range of $25 million to $35 million.
Although IHO has been more challenging than anticipated, we believe that the plan is on the right path towards achieving stable production and earnings and producing at name plate capacity. Moving on to the next slide.
This slide details out our coal rationalization plan. The top part of the slide details out our actions and the bottom part of the slide details out the financial impact of these actions.
In December, we began working on our mining plan and idled various mines, reducing production by 50%. We also eliminated approximately 50% of our workforce at that time.
Today, we announced that we are idling one additional mine and are eliminating the rest of our hourly mining workforce. We recognized some onetime costs in the fourth quarter related to these downsizing actions, which is detailed at the bottom of this chart.
We reviewed coal blend requirements, which are based on the quality specifications of our Jewell Coke contracts and evaluated various sourcing options. Our goal, of course, was to minimize cost and maintain quality.
The various scenarios that we considered were: one, sourcing all the coal from external coal suppliers; two, sourcing a portion of the coal from external coal suppliers and continuing to mine the balance of the coal with our own resources; and three, sourcing a portion of the coal from external coal suppliers and implementing a contract mining model to use contract miners to mine our reserves. The option that best preserved our flexibility -- that best preserved our option to sell and balance the impact to Jewell Coke while still maintaining the right coal blend characteristics for Jewell Coke was the last scenario.
So our plan is to purchase approximately 50,000 tons of high- and low-vol coal from third parties and use contract miners to mine approximately 600,000 tons of mid-vol coal from our own reserves. We're also planning on transitioning our coal washing and prep activities to a third-party in the first half of 2015, and we'll decommission our existing coal prep plant.
We expect an adjusted EBITDA loss of $20 million in 2015, which also includes the impact of lower coal sale price of roughly $12. We think that the first half of 2015 will be burdened with additional costs, as we move to execute the various actions of this plan, but we think a more reasonable run rate is in the $12.5 million range.
We also plan to install coal handling and blending capabilities at an investment cost of $5 million to $10 million for Jewell Coke. Turning to the next slide.
This slide highlights the benefits of the coal rationalization plan, specifically as it compares to the status quo. What the top section illustrates is the cash loss under the status quo scenario, which was essentially adjusted EBIT plus CapEx, and you can see that this grows significantly in 2015 to approximately $40 million.
What we have footnoted to the side of the slide is the estimated cost of $50 million to $70 million to build a new prep plant. This is not included in the $40 million estimate, but given the age and reliability of the existing prep plant, this CapEx would need to be spent if we continued the status quo operation.
The bottom section illustrates the cash loss under the coal rationalization plan. For 2015, we anticipate the coal rationalization plan -- under that plan, that coal would generate a negative $20 million in adjusted EBITDA, that we would spend capital to install coal handling and blending facilities at Jewell Coke, and that Jewell Coke would incur $7.5 million in standalone costs.
All in, that comes out to a cash loss between $33 million and $38 million. In 2016, we expect that this all-in number will be a loss of $20 million, when you normalize and have a run rate for the rationalization plan for coal.
You could see that this is favorable to the status quo scenario of $40 million. Of course, our job is going to be to manage these numbers and try to bring them down as much as possible.
Looking to the next slide. This schedule bridges 2014 adjusted EBITDA from continuing operations to 2015 expected adjusted EBITDA from continuing operations and walks down to consolidated adjusted EBITDA.
From a continuing ops basis, adjusted EBITDA is estimated to be $225 million to $245 million. This reflects the outlook at Indiana Harbor as well as the incremental costs to operate Jewell Coke as a standalone operation.
The other category includes incremental corporate costs for growth initiatives, India joint venture losses, offset by volume increases at coal logistics in Brazil. Walking down to consolidated adjusted EBITDA, which is not a cause of change, we have discussed the $20 million loss for coal operations.
In the legacy costs category, we are in the process of terminating our pension plan and plan to have that completed in 2015. We will incur a $13 million noncash accounting charge when the termination is complete.
The plan is fully funded at year end and this noncash charge reduces other comprehensive income. Turning to Slide 21.
We have discussed most of these items, but I wanted to point out a couple of things. CapEx is estimated to be approximately $90 million, $30 million in environmental spend and $60 million in ongoing.
This is an overall decrease of roughly $30 million year-over-year. Operating cash flow is expected to be in the range of $125 million to $145 million, an increase over the 2014 operating cash flow of $112.3 million.
So that -- you can see that we anticipate being in a good free cash flow position in 2015. Also, just to note, cash taxes will be in the range of $10 million to $15 million and reflect to the utilization of tax credit carryforward.
With that, I will turn it over to Fritz.
Frederick A. Henderson
Thanks, Fay. To wrap it up, on Page 22, I'll talk about value creation for shareholders.
As we think about growth, the importance of growth can't be underestimated. Our business itself, our coke business itself is designed, when run well, to be stable and generate stable, sustainable cash flows, as modest levels of CapEx.
Therefore, the growth needs to come through either organic or inorganic platforms. Organic, as we think about long-term project development, these would be projects that if initiated in 2015 would not be generating EBITDA until late '18, early '19 but nonetheless, they are very valuable, whether it's pursuing the construction of a new coke plant in Kentucky or pursuing a partnership with a selected partner in DRI.
So we do continue to do work on organic growth. On inorganic or M&A, the focus is, as I said before, on industrial facing, processing and handling assets.
And this is where we'll spend a considerable amount of time in early 2015. And then finally, the third leg of the stool, if you will, in terms of the value creation is capital allocation and capital optimization.
And as we think about the business and going into '15, both with the fundamentals of our business as well as the balance sheet that we have coming into the year, we think we've preserved significant flexibility to both fund growth as well as evaluate dividend increases as GP, LP cash flows grow. As we initiated our first dividend last year, we talked about it relative to GP, LP cash flows and as they grow, we maintained $75 million of authorization under our share repurchase program, and we implemented this morning $20 million towards that $75 million via ASR.
We do expect to grow our cash distributions at SXCP by 8% to 10% through 2016 from domestic drop-downs alone. And as we talked about on the SXCP call earlier, we will evaluate in 2015 potentially tightening our coverage ratio from 1.15 to approximately 1.1, which will provide further flexibility.
And as we look at the Granite City drop-down alone in 2015, it's our intent to increase distributions each quarter by 2% through 2015 from the first Granite City drop-down. That's our framework, if you will, for the value creation as we look into '15.
A few comments on the next chart on the steel industry. Relative to the third quarter, the recent both capital market as well as industry environment has shifted significantly negatively with respect to the environment for our customers.
As we look out at primary demand for steel in the U.S., it's I would say, the outlook is reasonable. Each of our customers, U.S.
Steel and AK Steel -- AK Steel earlier this week, U.S. Steel yesterday, talked about the demand outlook for steel in the U.S.
Automotive demand remains robust production. Nonresidential construction, I've seen estimates of growth in 2014 of about 6%, and the view is non-res construction would -- could grow between 5% and 7% in 2015.
The Architectural billing index remains, as the leading indicator, positive. And so as we think about this largest segment of steel demand, the view is that we would -- can see growth in non-res construction.
Any other hand, obviously, there are significant challenges in oil and gas and tubular. But demand outlook overall, I think we used the word reasonable because if you look at these pieces, I think, the demand outlook is reasonable.
Steel pricing, however, is under pressure. While there's been, what I would call, constructive consolidation in '14 in the industry, you see an elevated level of imports.
And the strong U.S. dollar, which was discussed by each of our customers on their calls is challenging the domestic producers.
On the cost side, the commodity prices do provide, I think, continued tailwinds into '15. On carbon, certainly coke as well as pulverized coal, we should see continued reductions in '15 versus '14.
Scrap. Most recently, and finally, to a different extent depending upon the manufacturer.
Iron ore, as we look into '15. We finally point is -- the final point is energy inputs should also be favorable as we look at the steel production.
Last point I would make, while each of our customers are executing their strategies and coping with the current environment, we do continue to see aged coke-making capacity get rationalized, which in our judgment, the scenario of aged coke-making capacity being taken offline is playing out as we speak. And I think we've certainly seen that as customers have taken actions regarding both cost reduction and capacity rationalization.
Page 24. As we thought about the movements in the SXC share prices certainly, most recently, we've been reflecting on why -- trying to understand why our share prices have behaved the way they are.
In part, obviously, in substantial part, it reflects our actions in the business whether it's the actions in the business around the coke business, to manage the coal divestiture, on growth, I mean there are a whole group of things that I think, we know we need to execute on in 2015 that were unevenly executed in 2014, particularly Indiana Harbor and the need to get that plant to run -- get at run rate. The other hand, if we look at the correlations and these charts go back to January of '13, and measure daily correlations of the share price of SXC versus both AK Steel as well as U.S.
steel, you can see high levels of correlation, and this is something we've most recently looked at, correlation coefficient with AK Steel of 0.9 and with U.S. steel, a little bit less but at 0.82.And as we think about this and try to make sense of this, I look at the fundamentals that affect our customers and we're not a steel company.
If you think about the issues that are affecting steel companies and steel demand, the pricing of steel and the pricing of commodities, and so you look at a significant amount of variability in the business model of the steelmaker. When you look at the business model of SunCoke, which is the last chart, as we look at the investment considerations for SunCoke and specifically SXC, we're not a steel company.
We maintain long-term partnerships with steel companies, but we're a long-term strategic supplier to those companies. And we think about our business, it starts with stable long-term cash flow, long-term take or pay contracts with strategic customers at strategic assets.
Our returns are generated in a fixed-fee structure. They're not driven by commodity prices.
They're driven by a fixed-fee structure, which doesn't vary. And we pass through coal and operating costs, by and large, across our fleet.
And so our business is about stable, steady cash flows with modest levels of CapEx in order to sustain them. Therefore, growth has to come through either organic projects or through M&A because it doesn't come from squeezing more out of our existing assets.
We can optimize, but we're not going make significant step changes in profitability from our existing assets. We enter the year with a strong balance sheet, essentially no net debt at the parent and net debt-to-EBITDA at SXCP of 3.1.
So we feel like we are conservatively managing the balance sheet, and we preserve the ability to both grow as well as allocate capital to shareholders. Limited legacy obligations.
Our legacy obligations as we've talked about, our pension is overfunded and will be terminated. OPEB is capped and black lung is, while it's provided volatility in our results, it's still on an absolute basis, relative to the overall balance sheet of the company, modest.
In terms of growth, we have done work on coal handling, we've done work in other areas in the past, but I think we do see opportunities in industrial-facing businesses that basically handle and process nonrenewable natural resources and would fit the model of qualifying income for SXCP and allowing us to drive SXC to more of a pure-play GP. We do have a visible drop-down structure.
We spent time talking about that. We're on path to achieve the goals that we set when we set up the MLP.
And then finally, in terms of capital allocation, we have declining ongoing environmental CapEx, the $90 million that Fay talked about was for environmental as well as ongoing, that didn't include any capital for our Raven project or DRI. To the extent that we are to undertake one or both of those projects, we feel like we have a balance sheet that would allow us to finance those projects, but they would be additive to the $90 million, but if we don't pursue those projects, CapEx is going to decline significantly year-to-year and operating cash flow rises.
So as we think about the flexibility we have in the business to both fund growth as well as allocate capital to shareholders, we feel like we're well positioned as we go into 2015. So with that, time for questions.
Operator
[Operator Instructions] And we have a question from Brett Levy from Jefferies.
Brett M. Levy - Jefferies LLC, Fixed Income Research
You gave some pretty specific guidance for 2015, early in the year, et cetera. Is -- I mean, is there a met coal pricing input number that goes into that?
Is there a sort of a contracted -- I guess, I'm trying to figure out the inputs and output assumptions that go into the guidance you put out and whether or not that has some variability around it.
Frederick A. Henderson
All right. You're talking about '15, right, Brett?
Brett M. Levy - Jefferies LLC, Fixed Income Research
Yes, I am.
Frederick A. Henderson
You said early in the year. We're in January.
So I'll just...
Brett M. Levy - Jefferies LLC, Fixed Income Research
Yes, yes. No, 2015.
But I mean you gave very specific guidance and I think there's a lot of variables in there, but tell me how much is and is not variable?
Frederick A. Henderson
All right. So the assumption we use for our Haverhill I price is about $90, number one.
Number two, it's not very variable because when you look at that -- when Fay talked about the $20 million declining to $12.5 million over time, by and large, what that is, is the transportation costs associated with bringing coal to the coke plant because the price in our Jewell Coke agreement is the Haverhill I price FOB mine. So what we're doing, our job is to manage that number down to the best of our abilities over time, and we become much less sensitive to coal prices than we were -- when we were much more significant in the mining business.
Now if prices were to rise, which we're not banking on them, but if they were to rise, we think actually that would probably allow us to make even further progress because our mines would be more marketable, but net-net, the assumption we're using is $90, and we're not very variable to that assumption because, in fact, we do receive a market price for our coal, it's the Haverhill I price, and what we have to do is manage down transportation costs.
Brett M. Levy - Jefferies LLC, Fixed Income Research
Got it. And then, can you talk a little bit about, kind of, organic growth whether it's in the U.S.
or internationally? I mean, I think you positioned yourself well to kind of take the next step, and I just want to get a sense as to sort of what you're thinking about either organic, build it or buy it and then, sort of what geographies are kind of on the list and off the list?
Frederick A. Henderson
Geographies, U.S. We would do a project in Canada but really, that's not likely.
Our focus is on the U.S. We're not focusing outside of the U.S.
And so that's the first part of your question. And then I would say, our organic projects, to the extent we were to do them, would be: one, either a new -- this new coke plant that we've been working on for Kentucky -- in Kentucky, excuse me; or alternatively a new DRI plant, which would also be in the U.S.
All -- both of those would generate qualifying income, both of those would be constructed at the parent and then dropped down at the conclusion of the construction period. On inorganic, M&A, again the focus is on the U.S., on businesses that would generate qualifying income.
They don't have to be 100% qualifying income but they got to -- they need to be the lion's share qualifying income because we think that over time, our right strategy is to take SXC to more of a pure-play GP.
Operator
And our next question is from Nathan Littlewood from Crédit Suisse.
Nathan Littlewood - Crédit Suisse AG, Research Division
I just had a couple of questions for you on the U.S. coke market broadly.
There've obviously been a couple of plants retired recently. One of your big customers was talking recently about a fairly lengthy shutdown at Granite City.
I'm just wondering if you could give us a bit of an update on how you're seeing the supply-demand balance for domestic coke over the next few years.
Frederick A. Henderson
So supply, when you talked about -- you mentioned was the Granite City announcement by U.S. Steel.
They've made a number of announcements about what's happening across their assets, and I'm not going to speak for my customers. But I'll just -- for the benefit of everybody on the call, what they -- several weeks ago, they announced they were going to permanently close their Granite City coke plant.
An aged byproduct coke plant. Historically, at the Granite City site, we would supply approximately -- since we have been in production, we supply approximately 70% of their requirements and their own internal coke plant would supply approximately 30% of their requirement.
We also provide about 80% of their super-heated steam for their turbine as part of our production. They announced they're going to close that plant permanently.
What they announced yesterday was at the Granite City location, they were making a significant investment actually to replace and put in a new casting line -- caster that they had purchased from RG Steel, and so they were going to be taking down one of their existing casters and basically accelerating the -- an outage they had planned on one of their 2 blast furnaces at the location. So there's a -- they're a lot of things going on at that site.
With respect to the coke capacity, though, what they're doing is they're taking, permanently, capacity out of about 300,000 tons. It's about where they've been running 300,000 to 350,000.
Last year, they announced significant -- some significant rationalization at Gary. They announced that they were closing their carbonics plant.
You've seen ArcelorMittal in the past has actually taken on a part of Dofasco's production. And so what we've seen is we've seen a continued decline in the supply balance from the byproduct batteries.
Obviously, the uncertain part is the demand part. Because, in fact, we're talking about is demand for coke for us to build a new coke plant.
The discussion with our customer is about 2018, '19, '20 and beyond because we wouldn't be in production until that point anyway. So my crystal ball there is a little less clear, but in terms of coke supply, it is moving down with these batteries being rationalized.
Nathan Littlewood - Crédit Suisse AG, Research Division
Sure. Okay.
Under a scenario where the Granite City outage U.S. Steel was talking about a few months, I think, but under a scenario where, let's say, there's some sort of mishap, it ends up taking a little bit longer or maybe it ends up taking them 6 months, for argument sake, and they decide.
All right, that's not such a bad thing because the market is pretty tough right now anyway, what sort of risk does that present to you in terms of this year's earnings and volumes?
Frederick A. Henderson
So let's start with the fundamentals, the contract, right? Our contract is -- our name plate capacity at Granite City is about 650,000, contract max is 680,000.
We've historically operated, right around 680,000 and the way our contract works is, if we produce the contract max, they're responsible for taking the coke. We've run that plant actually a little bit above 700,000 in the past in 1 year.
We've been able to do 24-hour coke, we've been able to do a number of things with that plant. So that's kind of the way the contract works.
Second is they are making an investment in that location actually to put this caster in. And what they've talked about is, the objective is to make the Granite City site even more flexible.
And as I look at their decision to make that investment there -- last year they did a major reline of one of the 2 blast furnaces, and what they're doing is accelerating the outage of the second blast furnace, what they said yesterday was they would bring that up depending upon market demand, makes sense to me. As we think about -- I can't speak for my customer.
But I can say that if they left that second blast furnace offline for a reasonable period of time, we think they're going to run that first blast furnace very hard and we're their source of coke for that location. So we've not had any indication from our customers of a desire to reduce our production from that plant, nor do we expect to, actually.
I wouldn't -- we have worked with customers in the past when they've had outages. AK Steel, for example, they had some production disruptions.
We diverted coke elsewhere as a result of that. We've reduced our production at Middletown by -- to a small extent.
None of this was material in the past. And so we've always been willing to work with our customers to try to accommodate their needs, but our contract is pretty clear, number one.
Number two, if you look at the dynamics of Granite City, we feel like we're in a good position. We're going to be the sole source of coke at that location in the longer term.
And number three, while we work with our customers in the past on a short-term basis, it's not historically been a significant issue for our results.
Nathan Littlewood - Crédit Suisse AG, Research Division
Sure, okay. Well, I guess, same sort of theme or question but thinking a little bit further out, I mean, we've got cost curves of both coking coal and iron ore that are falling pretty rapidly, globally.
The ferrous price environment whether you're talking about steel or scrap is sort of coming down across-the-board. The implications of that for the U.S.
steel industry is that the guys who are vertically integrated and have high fixed cost like U.S. Steel and to some extent, Mittal, are probably at a relative competitive disadvantage here.
So in a world where ferrous pricing is going to stay low for a few years, it's probably reasonable to expect that guys that are your customers are going to need to be offering the lion's share of the volume response. With that in mind, could you just talk a little bit about any contract renewals or contract maturities that are coming up in sort of the next 5 years?
Frederick A. Henderson
Okay. So Nathan, I'm not going to comment for my customers.
So the kind of the lead into your question, I'm just -- I'm not going to get into. Let me just talk -- let me answer your question.
Our next renewal is 2020. So we have several contracts with ArcelorMittal which come due in 2020, then we have the next one in 2023, so we -- at the outer edge of the 5-year period that you outlined, we have 2 contracts with ArcelorMittal that would come due for renewal.
Operator
[Operator Instructions] Our next question is from Lucas Pipes from Brean Capital.
Lucas Pipes - Brean Capital LLC, Research Division
I just wanted to follow-up on the coal side really quickly. I think you may have alluded to it earlier on the call, but in terms of these legacy costs, what is -- what's the going forward, kind of, past 2015 potential headwind on that item?
Fay West
So legacy costs for 2015 are anticipated to be roughly $15 million. What's included in there though is $13.5 million related to the pension termination, which is a noncash charge, so you can see the balance of that activity is nominal.
What's really driving -- I mean, you got puts and takes across the various liabilities, but the charge that we saw in 2014 related to black lung. We don't anticipate seeing that same level of charge in 2015.
Lucas Pipes - Brean Capital LLC, Research Division
Okay, great. So it's not that, that's very helpful.
And then maybe to continue on the coal side, you've gone through this optimization plan here in terms of finding a contractor in such, do you view that process as completed now? Are there further considerations at this stage?
How would you...
Frederick A. Henderson
I think I know what you're getting at. In the end, we're going to -- we will continue to be flexible with respect to the sale of coal assets.
One of the advantages of the approach we're taking is -- there are -- there's continued mining activities at the location albeit with contractors as opposed to company-run mines, which frankly provides us more flexibility to sell, and we will continue to be open to that. We're not counting on it, but we continue to be open to that.
Also, if it turns out that we are able to buy longer-term -- beyond 2015 significantly cheaper, we're flexible, right? We can basically -- we can stop contract mining and we can buy.
So this allows us to both mine at the location and this is principally mid-vol actually. High-vol and low-vol, there are good sources of high-quality coals relatively nearby with low logistics costs.
So that -- the flexibility means that if we just don't like the cost and/or the transportation cost associated with mid-vol, we can mine. On the other hand, to the extent that we see improved offers, we can buy.
So this number, the $12.5 million number that Fay talked about on a run-rate basis is a number we're going to spend time trying to manage down over time. What the strategy that we have is a flexible one because it provides us the flexibility to either buy or mine.
And moreover, the last piece of the puzzle is to develop, and we're working on this as we speak, develop lower cost sources of washing our coals, and we're testing it with 2 different companies today. These are miners, right?
They have capacity. We will wash coal with them as opposed to wash it ourself and then demolish our own prep plant, not have the cost of running that, not have to invest in it, not have to staff it -- and it's a prep plant as Fay talked about it.
I mean, we think by doing this, we'll actually improve our yields over time even on the coal that's mined locally. So we think that also improves our flexibility.
What I would say is net-net, this is -- we're going to spend time going forward trying to manage that number down. But by virtue of pursuing the plan we are on, we have flexibility to do that.
Okay. Lisa advises me that there are no more questions.
Just in terms of wrapping up, thanks very much for your time this morning, for dialing in, for your interest and for your -- not only your time but also your interest in investing in SunCoke, in the SXC shares. We covered a lot this morning.
Lisa and the team will be available to answer your questions. And with respect to 2015, we're hungry for the year, actually, to achieve our objective, so really appreciate your time.
Thanks.
Operator
Thank you, ladies and gentlemen. That concludes today's call.
Thank you for participating. You may now disconnect.