Sunoco 2008 Annual Report Download - page 20

technology, which is environmentally superior to the chemical by-product recovery technology currently used by
most other coke producers.
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 partnership
interest of the third-party investor in the Jewell cokemaking operation for $155 million. As a result, such third-
party investor is no longer entitled to any preferential or residual return in this operation.
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 the investor entitled to the preferential return recovered
its investment and achieved a cumulative annual after-tax return of approximately 10 percent). Those investors
are now entitled to a minority interest amounting to 34 percent of the partnership’s net income, which declines to
10 percent by 2038.
The following table sets forth information concerning cokemaking and coal mining operations:
2008 2007 2006
Production (Thousands of Tons):
Coke:
United States ............................................. 2,626 2,469 2,510
Brazil ................................................... 1,581 1,091 —
Metallurgical Coal ........................................... 1,179 1,220 1,179
Proven and Probable Metallurgical Coal Reserves
at December 31 (Millions of Tons) .............................. 100 101 102
In 2008, 84 percent of SunCoke Energy’s metallurgical coal production was converted into coke at the
Jewell plant, 11 percent was converted into coke at the Indiana Harbor and Haverhill plants and 5 percent was
sold in spot market transactions. In 2010, SunCoke Energy expects to commence an expansion project at its
Jewell coal mines in Virginia. This project, which is estimated to cost approximately $20 million, will phase in
500 thousand tons per year of additional production over a two-year period.
Most of the metallurgical coal used to produce coke at the Indiana Harbor and Haverhill cokemaking
operations is purchased from third parties. Sunoco believes there is an ample supply of metallurgical coal
available, and it has been able to supply these facilities without any significant disruption in coke production.
Substantially all coke sales from the Indiana Harbor and Jewell plants and 50 percent of the production from
the Haverhill plant (once it becomes fully operational) are made pursuant to long-term contracts with affiliates of
ArcelorMittal. The balance of coke produced at the Haverhill plant is sold to two affiliates of OAO Severstal
under long-term contracts. In addition, the technology and operating fees, as well as preferred dividends
pertaining to the Brazilian cokemaking operation are payable to SunCoke Energy under long-term contracts with
a project company in which a Brazilian subsidiary of ArcelorMittal is the major shareholder. Neither
ArcelorMittal nor OAO Severstal has provided any indication that they will not perform under those contracts.
However, in the event of nonperformance, SunCoke Energy’s results of operations and cash flows would be
adversely affected.
Production from the Indiana Harbor plant is sold and delivered to ArcelorMittal’s Indiana Harbor Works
steel plant, which is adjacent to the Indiana Harbor coke plant. The coke purchase agreement requires SunCoke
Energy to provide ArcelorMittal with 1.22 million tons of coke annually on a take-or-pay basis through 2013.
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