Sunoco 2008 Annual Report Download - page 22

Download and view the complete annual report

Please find page 22 of the 2008 Sunoco annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 120

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120

In February 2008, SunCoke Energy entered into an agreement with U.S. Steel under which SunCoke Energy
will build, own and operate a 650 thousand tons-per-year cokemaking facility adjacent to U.S. Steel’s
steelmaking facility in Granite City, Illinois. Construction of this facility, which is estimated to cost
approximately $300 million, is currently underway and is expected to be completed in the fourth quarter of 2009.
Expenditures through December 31, 2008 totaled $164 million. In connection with this agreement, U.S. Steel has
agreed to purchase on a take-or-pay basis, over a 15-year period, such coke production as well as the steam
generated from the heat recovery cokemaking process at this facility.
In March 2008, SunCoke Energy entered into an agreement with AK Steel under which SunCoke Energy
will build, own and operate a cokemaking facility and associated cogeneration power plant adjacent to AK
Steel’s Middletown, Ohio steelmaking facility subject to resolution of all contingencies, including necessary
permits. These facilities are expected to cost in aggregate approximately $350 million and be completed 15 to 18
months after resolution of the contingencies, which may move the targeted completion date beyond the
previously announced 2010. The plant is expected to produce approximately 550 thousand tons of coke per year
and, on average, 46 megawatts of power into the regional power market. In connection with this agreement, AK
Steel has agreed to purchase, over a 20-year period, all of the coke and available electrical power from these
facilities. Expenditures through December 31, 2008 totaled $48 million, with additional funds committed of
approximately $25 million. In the event contingencies (including permit issues) to constructing the project cannot
be resolved, AK Steel is obligated to reimburse substantially all of these amounts to Sunoco.
SunCoke Energy is currently discussing other opportunities for developing new heat recovery cokemaking
facilities with domestic and international steel companies. Such cokemaking facilities could be either wholly
owned or developed through other business structures. As applicable, the steel company customers would be
expected to purchase coke production under long-term take-or-pay contracts or on an equivalent basis. The
facilities would also generate steam, which would typically be sold to the steel customer, or electrical power,
which could be sold to the steel customer or into the local power market. SunCoke Energy’s ability to enter into
additional arrangements is dependent upon market conditions in the steel industry.
Competition
In all of its operations, Sunoco is subject to competition, both from companies in the industries in which it
operates and from companies in other industries that produce similar products.
The refining and marketing business is very competitive. Sunoco competes with a number of other domestic
refiners and marketers in the eastern half of the United States, with integrated oil companies, with foreign
refiners that import products into the United States and with producers and marketers in other industries
supplying alternative forms of energy and fuels to satisfy the requirements of the Company’s industrial,
commercial and individual consumers. Some of Sunoco’s competitors have expanded capacity of their refineries
and internationally new refineries are coming on line which could also affect the Company’s competitive
position.
Profitability in the refining and marketing industry depends largely on refined product margins, which can
fluctuate significantly, as well as operating efficiency, product mix, and costs of product distribution and
transportation. Certain of Sunoco’s competitors that have larger and more complex refineries may be able to
realize lower per-barrel costs or higher margins per barrel of throughput. Several of Sunoco’s principal
competitors are integrated national or international oil companies that are larger and have substantially greater
resources than Sunoco. Because of their integrated operations and larger capitalization, these companies may be
more flexible in responding to volatile industry or market conditions, such as shortages of feedstocks or intense
price fluctuations. Refining margins are frequently impacted by sharp changes in crude oil costs, which may not
be immediately reflected in product prices.
The refining industry is highly competitive with respect to feedstock supply. Unlike certain of its
competitors that have access to proprietary sources of controlled crude oil production available for use at their
14