Sunoco 2010 Annual Report Download - page 55

price to an amount equal to the sum of (i) the cost of delivered coal to the Haverhill facility increased by the
application of a fixed adjustment factor, (ii) actual transportation costs, (iii) an operating cost component indexed
for inflation, (iv) a fixed fee component, and (v) applicable taxes (except for property and net income taxes).
Beginning in July 2009, ArcelorMittal initiated legal proceedings challenging the prices charged to ArcelorMittal
under the coke purchase agreement. In August 2010, ArcelorMittal presented SunCoke Energy with additional
bases for challenging the prices charged for coke produced at the Jewell facility as well as its Haverhill facility
and also presented its notice of intent to arbitrate outstanding issues relating to the Indiana 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. If the amendments to the Jewell and Haverhill coke supply
agreements had been in place during 2010, SunCoke’s pretax earnings would have been reduced by
approximately $60 million. 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 March 2008, SunCoke Energy entered into a coke purchase agreement and related energy sales
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, OH steelmaking facility. In February
2010, SunCoke Energy obtained the necessary permits to build and operate the plant, although some of them
have been appealed. These facilities are expected to cost in aggregate approximately $415 million and be
completed in the second half of 2011. The plant is expected to produce 550 thousand tons of coke per year and
provide, on average, 44 megawatts of power. 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, 2010 totaled $253 million.
In April 2010, SunCoke Energy commenced a project to expand its coal production by approximately
500,000 tons per year to an annualized rate of approximately two million tons by late 2012 (including production
from its Harold Keene Coal Co., Inc. acquisition). Capital outlays for this project are expected to total
approximately $25 million.
SunCoke Energy is currently conducting an engineering study to evaluate the expected physical life of the
coke ovens at its Indiana Harbor operation. Some ovens and associated equipment are heaving and settling
differentially as a result of the instability of the ground on which it was constructed. This differential movement
has reduced production and required corrective action to certain ovens, ancillary equipment and structures.
Higher maintenance costs are expected to continue as a result of this condition. SunCoke Energy has completed a
capital project to improve the stability of certain boiler supports and the emission shed supports, which
previously had been damaged as a result of such differential movement. In addition, an oven repair and
maintenance program has been implemented to limit further deterioration to the ovens. The engineering study at
Indiana Harbor is expected to be completed during the first quarter of 2011. At this time, the likely outcome of
the study cannot be determined. Possible results include additional maintenance spending to continue operations
at the current operating levels, a change in the useful life of all or part of the plant, or the impairment of one or
more oven batteries which could be followed by capital spending to retain the current plant capacity. The
carrying amount of the Indiana Harbor coke facility was $119 million at December 31, 2010.
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 contracts. The facilities would also generate steam, which
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