Sunoco 2009 Annual Report Download - page 50

Sunoco received a total of $415 million in exchange for interests in its Indiana Harbor cokemaking
operations in two separate transactions in 1998 and 2002. Sunoco did not recognize any gain as of the dates of
these transactions because the third-party investors were entitled to a preferential return on their respective
investments. The returns of the investors were equal to 98 percent of the cash flows and tax benefits from such
cokemaking operations during the preferential return period, which continued until the fourth quarter of 2007 (at
which time both investors had recovered their investment and achieved a cumulative annual after-tax return of
approximately 10 percent). Those investors are now entitled to a noncontrolling interest amounting to 34 percent
of the partnership’s net income, which declines to 10 percent by 2038. Prior to completion of the preferential
return period, expense was recognized to reflect the investors’ preferential returns. Such expense, which is
included in Net Financing Expenses and Other under Corporate and Other in the Earnings Profile of Sunoco
Businesses, totaled $13 million after tax in 2007. With the completion of the preferential return periods, the third-
party investor’s share of net income is now recognized as expense by the Coke business.
With respect to the Jewell operation, beginning in January 2008, the price of coke from this facility (700
thousand tons per year) changed from a fixed price to an amount equal to the sum of (i) the cost of delivered coal
to the Haverhill facility multiplied by an adjustment factor, (ii) actual transportation costs, (iii) an operating cost
component indexed for inflation, (iv) a fixed-price component, and (v) applicable taxes (except for property and
net income taxes). In July 2009, ArcelorMittal filed a lawsuit in Ohio state court challenging the prices charged
to ArcelorMittal under the coke purchase agreement. The lawsuit was removed to federal court in Ohio and in
January 2010, a motion was granted to dismiss the lawsuit without prejudice on the basis of ArcelorMittal’s
failure to allege facts that are sufficient to raise a right of relief above the speculative level. ArcelorMittal has
filed an amended complaint in February 2010. SunCoke Energy continues to believe that the prices have been
determined in accordance with the agreement and intends to vigorously defend its rights under the coke
agreement.
In February 2007, SunCoke Energy entered into coke purchase agreements with two affiliates of OAO
Severstal under which SunCoke Energy would build, own and operate an expansion of the Haverhill plant (that
would double this facility’s cokemaking capacity to 1.1 million tons of coke per year) and the addition of a
cogeneration power plant. Operations from the expansion of this cokemaking facility commenced in July 2008
with the expansion essentially completed in the second quarter of 2009. Capital outlays for the project totaled
$269 million. In connection with the coke purchase agreements, the affiliates of OAO Severstal agreed to
purchase, on a take-or-pay basis, over a 15-year period, 550 thousand tons per year of coke from the cokemaking
facility. In August 2009, SunCoke Energy entered into a 12-year coke purchase agreement and companion
energy sales agreement with AK Steel, which replaced the take-or-pay contract with the affiliates of OAO
Severstal effective September 1, 2009 and January 1, 2010, respectively. Under the new agreements, beginning
January 1, 2010, AK Steel is required to purchase all 550 thousand tons of coke per year from this facility (AK
Steel had a limited purchase obligation of 13.5 thousand tons of coke for 2009). In addition, under the energy
sales agreement, AK Steel is obligated to purchase 50 percent of the electricity produced at the associated
cogeneration power plant beginning in May 2010. These contracts are subject to early termination after
November 2014 provided AK Steel has given at least two years notice of its intention to terminate.
In February 2008, SunCoke Energy entered into a coke purchase agreement and related energy sales
agreement with US Steel under which SunCoke Energy would build, own and operate a 650 thousand
tons-per-year cokemaking facility adjacent to US Steel’s steelmaking facility in Granite City, IL. Operations
from this cokemaking facility commenced in the fourth quarter of 2009. Capital outlays for the project totaled
$320 million. Under the agreement, US Steel has agreed to purchase on a take-or-pay basis, over a 15-year
period, all coke production as well as the steam generated from the heat recovery cokemaking process at this
facility.
Substantially all coke sales from the Indiana Harbor and Jewell plants and 50 percent of the production from
the Haverhill plant are made pursuant to long-term contracts with affiliates of ArcelorMittal. The balance of coke
produced at the Haverhill plant is sold to AK Steel and the coke produced at the Granite City plant is sold to US
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