Sunoco 2008 Annual Report Download - page 48

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 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 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.
Prior to completion of the preferential return periods, expense was recognized to reflect the investors’
preferential returns in the Jewell and Indiana Harbor operations. Such expense, which is included in Net
Financing Expenses and Other under Corporate and Other in the Earnings Profile of Sunoco Businesses, totaled
$13 and $31 million after tax in 2007 and 2006, respectively. Income is recognized by the Coke business as coke
production and sales generate cash flows and tax benefits. Such cash flows and tax benefits were allocated to
Sunoco and the third-party investors prior to completion of the preferential return periods. The Coke business’
after-tax income attributable to the tax benefits, which primarily consist of nonconventional fuel credits, was $17,
$20 and $38 million after tax in 2008, 2007 and 2006, respectively. Under existing tax law, beginning in 2008,
most of the coke production at Jewell and all of the coke production at Indiana Harbor are no longer eligible to
generate nonconventional fuel tax credits. With the completion of the preferential return periods, the third-party
investor’s share of net income is now recognized as minority interest expense by the Coke business.
With respect to the Jewell operation, beginning in 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, and (iv) a fixed-price component.
In February 2007, SunCoke Energy entered into an agreement with two affiliates of OAO Severstal under
which a local affiliate of 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 a cogeneration power
plant. Limited operations from this cokemaking facility commenced in July 2008 with full operations expected in
the second quarter of 2009. Total capital outlays for the project are estimated at $265 million, of which $254
million has been spent through December 31, 2008. In connection with this agreement, two affiliates of OAO
Severstal agreed to purchase, over a 15-year period, 550 thousand tons per year of coke from the cokemaking
facility. The flue gas produced during the cokemaking process is used to generate low-cost steam that is sold to
the adjacent chemical manufacturing complex owned and operated by Sunoco’s Chemicals business and
electricity for sale into the regional power market. The cogeneration plant, which includes a 67 megawatt turbine,
is expected to provide, on average, 46 megawatts of power. With the income attributable to this project and the
anticipated impact of higher coal prices on Jewell coke prices in 2009, Coke’s income is expected to total
approximately $175-$200 million after tax for the full-year 2009.
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.
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