Sunoco 2003 Annual Report Download - page 22

Financing Expenses and Other under Corporate and Other in the Earnings Profile of
Sunoco Businesses, totaled $36, $27 and $21 million after tax in 2003, 2002 and 2001,
respectively.
Under the current tax law, beginning in 2003, a portion of the coke production at Jewell is
no longer entitled to tax credits, which has resulted in a decline in Coke’s annual income
of $6 million after tax. The remainder of the coke production at Jewell and all of the pro-
duction at Indiana Harbor are eligible to generate credits through 2007.
The preferential return period for the Jewell operation is expected to end in 2011. The pref-
erential return period for the first investor in the Indiana Harbor operation ended in July
2002, at which time the first investor’s interest in the cash flows and tax benefits from In-
diana Harbor decreased from 95 percent to 5 percent. As a result of an additional $215
million investment in July 2002, third-party investors’ interests in Indiana Harbor in-
creased from 5 percent to 98 percent. The new investor’s preferential return period for the
Indiana Harbor operation is expected to end in 2007. The estimated lengths of these
preferential return periods are based upon the Company’s current expectations of future
operations, including sales volumes and prices, rawmaterial and operating costs and capital
expenditure levels. Better-than-expected results will shorten the investors’ preferential re-
turn periods, while lower-than-expected results will lengthen the periods.
After these preferential return periods, the investor in the Jewell operation will be entitled
to a minority interest in the cash flows and tax benefits from Jewell amounting to 18 per-
cent, while the investors in the Indiana Harbor operation will be entitled to a minority
interest in the cash flows and tax benefits from Indiana Harbor initially amounting to 34
percent and declining to 10 percent by 2038.
Substantially all coke sales are currently made under long-term contracts with Interna-
tional Steel Group (“ISG”) and Ispat Inland Inc. (“Ispat”). Both ISG and Ispat have credit
ratings belowinvestment-grade. Neither ISG nor Ispat have given any indication that they
will not perform under their contracts. However, in the event of nonperformance, the
Coke business’ results of operations and cash flows may be adversely affected and the
period during which the third-party investors are entitled to preferential returns could be
extended.
In October 2003, Sun Coke entered into an agreement with three affiliates of ISG under
which Sun Coke will build and operate a 550,000 tons-per-year cokemaking facility in
Haverhill, OH. Construction of this facility, which is estimated to cost approximately $140
million, commenced in December 2003, and the facility is expected to be operational in
March 2005. In connection with this agreement, ISG has agreed to purchase 550,000 tons
per year of coke from this facility, which is in addition to the 700,000 tons it currently is
purchasing annually from Jewell’s production through 2005. These two contracts have
been combined into a 15-year, 1.25 million tons-per-year contract. In addition, the heat
recovery steam generation associated with the cokemaking process at this facility will pro-
vide lowcost steam to the Company’s adjacent chemical manufacturing complex.
In April 2003, Sun Coke entered into an agreement with three major steel companies and
a major iron ore producer under which Sun Coke would build and operate a production
facility and associated cogeneration power plant in Vitória, Brazil. The companies have
agreed to long-term commitments whereby Sun Coke would produce coke for the custom-
ers under a tolling agreement, and each customer would purchase a pro-rata share of the
power produced at the facility. Sun Coke’s commitment to this project is subject to a
number of contingencies including: approval by Sunoco’s Board of Directors; finalization of
the construction cost; obtaining all requisite permits; and obtaining financing satisfactory
to Sunoco. If these contingencies are satisfied, construction of the facilities, which is esti-
mated to cost approximately $300-$350 million, would begin in 2004, and management
expects the facilities would be operational in 2006.
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