Sunoco 2007 Annual Report Download - page 17

Coke
The Coke business, through SunCoke Energy, Inc. (formerly, Sun Coke Company) and its
affiliates (individually and collectively, “SunCoke Energy”), currently makes high-quality,
blast-furnace coke at its Indiana Harbor facility in East Chicago, IN, at its Jewell facility in
Vansant, VA, at its Haverhill facility in Franklin Furnace, OH, and at a facility in Vitória,
Brazil, and produces metallurgical coal from mines in Virginia, primarily for use at the Jew-
ell cokemaking facility. In addition, the Indiana Harbor plant produces heat as a
by-product that is used by a third party to produce electricity, the Haverhill plant produces
steam that is sold to Sunoco’s Chemicals business and the Vitória plant produces steam
that is sold to the majority common shareholder of the project company that developed
the facility. The Vitória, Brazil facility commenced limited operations in the first quarter of
2007, with full production achieved in the fourth quarter. SunCoke Energy is the operator
of the Vitória facility, and, during the fourth quarter of 2007, increased its investment in
the project company, as planned, by becoming its sole subscriber of preferred shares for a
total equity interest of $41 million. An additional cokemaking facility and associated co-
generation power plant are currently under construction at the Haverhill site, which are
expected to be operational in the second half of 2008.
2007 2006 2005
Income (millions of dollars) $29 $50 $48
Coke production (thousands of tons):
United States 2,469 2,510 2,405
Brazil 1,091 ——
Coke segment income decreased $21 million in 2007 primarily due to a $12 million in-
crease in the partial phase-out of tax credits resulting from the high level of crude oil prices
and the absence of a $3 million investment tax credit adjustment related to the Haverhill
facility. Also contributing to the decline in earnings were higher costs and lower sales
prices at the Jewell coal operations and higher depreciation and selling, general and
administrative expenses. Partially offsetting these negative factors was $4 million of in-
come from the 1.7 million tons-per-year cokemaking facility in Vitória, Brazil. In 2007 and
2006, Coke recorded 30 and 65 percent, respectively, of the tax credits that otherwise
would have been available without regard to the phase-out provisions with the partial
phase-out reducing earnings by $20 and $8 million, respectively, during those periods.
Coke segment income increased $2 million in 2006 due primarily to tax credits attribut-
able to Coke’s existing Jewell and Haverhill cokemaking facilities, which benefited Coke’s
income by $6 million in 2006, and the $3 million investment tax credit adjustment related
to the Haverhill facility. Also contributing to the improvement in Coke’s earnings were
higher income from the Haverhill facility and lower selling, general and administrative
expenses. Partially offsetting these positive factors were the $8 million partial phase-out of
tax credits during 2006 and the absence of a gain from a litigation settlement.
Sunoco received a total of $309 million in exchange for interests in its Jewell cokemaking
operations in two separate transactions in 1995 and 2000. Sunoco also 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. In December 2006, Sunoco acquired the limited partner-
ship interest of the third-party investor in the Jewell cokemaking operation for $155 mil-
lion and recognized a $3 million after-tax loss in 2006 in connection with this transaction.
This loss is included in Net Financing Expenses and Other under Corporate and Other in
the Earnings Profile of Sunoco Businesses.
The returns of the investors in the Indiana Harbor cokemaking operations 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
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