Sunoco 2005 Annual Report Download - page 20

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 1.7 million tons-per-year
cokemaking facility and associated cogeneration power plant in Vitória, Brazil. Those
agreements generally include: technology license agreements whereby Sun Coke has li-
censed its proprietary technology to a project company (the “Project Company”); an en-
gineering and technical services agreement whereby Sun Coke is providing 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 one
percent equity interest in the Project Company and an option to purchase an additional 19
percent equity interest. Sun Coke expects to exercise this option in 2006 or 2007 for
approximately $35 million. The Off-takers will purchase from the Project Company all
coke production under long-term agreements, and one of the Off-takers will purchase all of
the electricity produced at the cogeneration power plant. Those off-take agreements are
still to be negotiated. Construction of the facilities commenced in November 2004 and the
facilities are expected to be operational in the fourth quarter of 2006.
Sun Coke is currently discussing other opportunities for developing new heat recovery
cokemaking facilities with several domestic and international steel companies. Such
cokemaking facilities could be either wholly owned or owned through a joint venture with
one or more parties. The steel company customers would be expected to purchase the coke
production on a take-or-pay or equivalent basis.
Corporate and Other
Corporate Expenses—Corporate administrative expenses increased $17 million in 2005
primarily due to higher employee-related expenses and a $6 million after-tax accrual for
the adoption of a new accounting interpretation related to asset retirement obligations,
partially offset by lower accruals for retrospective insurance premiums. In 2004, Corporate
administrative expenses increased $27 million largely due to higher employee-related ex-
penses and a $10 million after-tax accrual for retrospective insurance premiums. The
higher employee-related expenses in both 2005 and 2004 were primarily due to higher ac-
cruals for performance-related incentive compensation.
Net Financing Expenses and Other—Net financing expenses and other decreased $33 million
in 2005 in part due to lower interest expense ($9 million) as the savings from the debt re-
structuring activities that occurred in 2004 were partially offset by higher borrowings at
Sunoco Logistics Partners L.P. Higher capitalized interest ($9 million), higher interest in-
come ($8 million) and lower expense attributable to the preferential return of third-party
investors in Sunoco’s cokemaking operations ($4 million) also contributed to the decline
in net financing expenses and other in 2005. In 2004, net financing expenses and other
decreased $21 million primarily due to lower interest expense in part resulting from the
debt restructuring activities ($6 million), lower expense attributable to the preferential
return of third-party investors in Sunoco’s cokemaking operations ($5 million), a higher
effective income tax rate ($6 million) and higher capitalized interest ($5 million). The
Company recognized a $34 million after-tax loss in 2004 due to the early extinguishment
of the debt, which is reported separately under Corporate and Other in the Earnings Pro-
file of Sunoco Businesses. (See “Financial Condition—Financial Capacity” below and
Note 11 to the consolidated financial statements.)
Income Tax Matters—During 2005, Sunoco settled certain federal income tax issues and
established a provision for certain state and local tax matters, the net effect of which was
to increase net income by $18 million. During 2004, Sunoco settled a dispute concerning
the computation of interest on numerous federal income tax issues which increased net
income by $18 million. (See Notes 3 and 4 to the consolidated financial statements.)
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