Sunoco 2010 Annual Report Download - page 21

Harbor facility, including, among other things, the prices charged for coke produced at that facility. SunCoke
Energy and ArcelorMittal participated in court ordered mediation in January 2011 which resulted in a
commercial resolution of these issues. The parties agreed to amend the Jewell and Haverhill coke supply
agreements effective January 1, 2011 to eliminate the fixed coal cost adjustment factor in the Jewell agreement
and increase the operating cost and fixed fee components payable to SunCoke Energy under both agreements.
The parties also agreed that volume under both contracts will remain take-or-pay through the end of the contracts
in December 2020 rather than converting to “requirements” in the fourth quarter of 2012. This extension provides
SunCoke a guaranteed outlet for this coke production through 2020. In February 2011, ArcelorMittal and
SunCoke Energy also entered into a confidential settlement to resolve the Indiana Harbor arbitration claims. This
settlement will not significantly impact SunCoke Energy’s future income from the Indiana Harbor operations.
In February 2007, SunCoke Energy entered into coke purchase agreements with two affiliates of OAO
Severstal under which SunCoke Energy would build, own and operate an expansion of the Haverhill plant (that
would double its cokemaking capacity to 1.1 million tons of coke per year) and the addition of a cogeneration
power plant. Operations from the expansion of this cokemaking facility commenced in July 2008 with the
expansion essentially completed in the second quarter of 2009. Capital outlays for the project totaled
$269 million. In connection with the coke purchase agreements, the affiliates of OAO Severstal agreed to
purchase on a take-or-pay basis, over a 15-year period, 550 thousand tons per year of coke from the cokemaking
facility. In August 2009, SunCoke Energy entered into a 12-year coke purchase agreement and companion
energy sales agreement with AK Steel, which replaced the take-or-pay contract with the affiliates of OAO
Severstal effective September 1, 2009 and January 1, 2010, respectively. Under the new agreements, beginning
January 1, 2010, AK Steel is required to purchase all 550 thousand tons of coke per year from this facility (AK
Steel had a limited purchase obligation of 13.5 thousand tons of coke for 2009). In addition, under the energy
sales agreement, AK Steel is obligated to purchase 50 percent of the electricity produced at the associated
cogeneration power plant beginning in May 2010. These contracts are subject to early termination after
November 2014 provided AK Steel has given at least two years notice of its intention to terminate and has met
certain other conditions. In 2009 and 2010, coke was sold to AK Steel at a fixed price. Beginning January 1,
2011, the price of coke sold to AK Steel reflects the pass through of coal and transportation costs, an operating
cost component and all applicable taxes (excluding net income taxes), as well as a fixed cost component. AK
Steel is entitled to receive under the Haverhill agreement, as a credit to the price of coke, an amount representing
a percentage of the realized value of certain applicable nonconventional fuels tax credits, to the extent such
credits are available.
The flue gas produced at Haverhill 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 to AK Steel and into the regional power market. The cogeneration plant, which includes a 67
megawatt turbine, will provide, on average, 46 megawatts of power.
During 2007, SunCoke Energy commenced operations on behalf of the local project company at a
1.7 million tons-per-year cokemaking facility and associated cogeneration power plant located in Vitória, Brazil.
It also increased its investment in the Vitória coke plant during 2007 by becoming the sole subscriber of
preferred shares in the project company for a total equity interest of $41 million. Originally, under a series of
agreements with the local project company, in which ArcelorMittal Brasil is the major shareholder (“AMB”),
AMB agreed to purchase all of the coke and steam produced at the cokemaking facility under a long-term tolling
arrangement and SunCoke Energy agreed to operate the cokemaking facility for a term of not less than 15 years
and receive fees for operating the plant as well as for the licensing of SunCoke Energy’s proprietary technology.
SunCoke Energy is also entitled to a $9 million annual dividend for 15 years beginning in 2008, assuming certain
minimum production levels are achieved at the Vitória coke plant. In addition, AMB and SunCoke Energy have a
call and put option, respectively, on SunCoke Energy’s investment in the project company, which can be
exercised in 2024. The option price is $41 million, plus any unpaid dividends and related interest. In the fourth
quarter of 2009, the commercial and investment structure was modified to allow the local project company to
lease the coke facility to AMB rather than enter into a long-term tolling agreement for coke. As part of this
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