Sunoco 2006 Annual Report Download - page 19

estimated impact of this phase-out reduced earnings for 2006 by $8 million after tax. The
ultimate amount of the credits to be earned for 2006 will be based upon the average annual
price of domestic crude oil at the wellhead. If the annual crude oil price averages at or
above the top of the inflation-adjusted range during 2007, then it is estimated that the
corresponding reduction in Coke’s after-tax income would approximate $30 million for
that year. The above estimates incorporate increased coke prices resulting from the expira-
tion or any phase-out of the tax credits with respect to coke sold under the long-term con-
tract from the Indiana Harbor plant.
The energy policy legislation enacted in August 2005 includes additional tax credits per-
taining to a portion of the coke production at Jewell, all of the production at Haverhill and
all future domestic coke plants placed into service by January 1, 2010. The credits cover a
four-year period, effective January 1, 2006 or the date any new facility is placed into serv-
ice, if later. The credits attributable to Coke’s existing Jewell and Haverhill facilities are
expected to benefit Coke’s future annual income by approximately $8 million after tax.
These tax credits are not subject to any phase-out based upon crude oil prices.
Substantially all coke sales from the Indiana Harbor, Jewell and Haverhill plants are made
pursuant to long-term contracts with Mittal Steel USA, Inc. (“Mittal USA”). Mittal USA
has not provided any indication that it will not perform under those contracts. However,
in the event of nonperformance, the Coke business’ results of operations and cash flows
may be adversely affected.
In August 2004, Sun Coke entered into a series of agreements with Companhia
Siderúrgica de Tubarão and Cia. Siderúrgica Belgo-Mineira (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: technol-
ogy license agreements whereby Sun Coke has licensed its proprietary technology to a
project company (the “Project Company”); an engineering and technical services agree-
ment whereby Sun Coke is providing engineering and construction-related technical serv-
ices to the Project Company; an operating agreement 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 a one percent equity interest in the Project Company and
expects to make an additional $35 million investment in 2007. The Off-takers will pur-
chase 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. Limited operations are expected to commence at the facilities in the first quarter of
2007, with full production expected in mid-2007.
In February 2007, Sun Coke entered into an agreement with two customers under which
Sun Coke will build, own and operate a second 550,000 tons-per-year cokemaking facility
at its Haverhill site. Construction of this facility, which is estimated to cost approximately
$230 million, is expected to commence in the first quarter of 2007, and the facility is ex-
pected to be operational in the second half of 2008. In connection with this agreement, the
customers agreed to purchase, over a 15-year period, a combined 550,000 tons per year of
coke from this facility. In addition, the heat recovery steam generation associated with the
cokemaking process at this facility will produce and supply steam to a 67 megawatt turbine,
which will provide, on average, 46 megawatts of power into the regional power market.
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 under a long-term take-or-pay contract or equivalent basis.
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