Sunoco 2004 Annual Report Download - page 22

by sales volumes and prices, raw material and operating costs, capital expenditure levels
and the ability to recognize tax benefits under the current tax law. Better-than-expected
cash flows and tax benefits will shorten the investors’ preferential return periods, while
lower-than-expected cash flows and tax benefits will lengthen the periods.
Following any expiration of these preferential return periods, the investor in the Jewell
operation would be entitled to a minority interest in the related cash flows and tax benefits
amounting to 18 percent, while the investors in the Indiana Harbor operation would be
entitled to a minority interest in the related cash flows and tax benefits initially amounting
to 34 percent and thereafter 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. Both ISG and Ispat have credit ratings below invest-
ment 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’ re-
sults of operations and cash flows may be adversely affected. In October 2004, Ispat
International N.V. (the parent of Ispat) announced that it has entered into a merger
agreement with ISG whereby ISG will become a wholly owned subsidiary of Ispat Interna-
tional N.V. Ispat International N.V. also announced that it has agreed to acquire LNM
Holdings N.V., both of which are under common control. According to the announce-
ment, the merger with ISG is subject to the completion of the acquisition of LNM Hold-
ings N.V., and shareholder and regulatory approvals, and is expected to be completed
during the first quarter of 2005. Standard and Poors Rating Services and Moody’s Investors
Service both have indicated that they have placed the credit ratings of Ispat and ISG under
review for possible upgrade.
In October 2003, Sun Coke entered into a 15-year coke purchase agreement with three af-
filiates of ISG to supply 550 thousand tons per year of coke from a new plant currently un-
der construction near Haverhill, OH. Coke will be supplied to ISG on a take-or-pay basis
for the first seven years, and thereafter based upon ISG’s requirements in excess of ISG’s
existing coke production and its obligations in respect of the Jewell agreement described
below. Construction of the Haverhill plant commenced in December 2003, and initial
coke production is scheduled to begin during March 2005. The construction costs are
estimated to total $146 million. Expenditures through December 2004 totaled approx-
imately $129 million. The Haverhill plant will utilize the waste flue gas to generate low-
cost steam that will be sold to the adjacent chemical manufacturing complex owned and
operated by Sunoco’s Chemicals business.
Sun Coke has also entered into a 15-year coke purchase agreement with ISG to supply ISG
with 700 thousand tons per year of coke from the Jewell Vansant plant. The term of that
agreement is concurrent with the term of the Haverhill agreement. Coke will be supplied
on a take-or-pay basis for the first seven years of that term, and thereafter will be supplied
based upon ISG’s requirements in excess of ISG’s existing coke production.
In August 2004, Sun Coke entered into a series of agreements with two major steel compa-
nies (the “Off-takers”) with respect to the development of a 1.6 million metric tons-per-
year cokemaking facility and associated cogeneration power plant in Vitória, Brazil. Those
agreements generally include: technology license agreements whereby Sun Coke will li-
cense its proprietary technology to a project company (the “Project Company”); an en-
gineering and technical assistance agreement whereby Sun Coke will provide engineering
and construction–related technical services to the Project Company; an operating agree-
ment whereby a local subsidiary of Sun Coke will operate the cokemaking and water
treatment plant facilities for a term of not less than 15 years; and an investment agreement
by and among Sun Coke and the Off-takers whereby Sun Coke has acquired an initial 1
percent equity interest in the Project Company as well as an option to purchase, at net
book value, an additional 19 percent equity interest. The Off-takers will purchase from the
Project Company all coke production under long-term agreements and one of the steel
20